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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment
Number Two
to
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005 Commission File Number 0-25135
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
BANK OF COMMERCE HOLDINGS
(Exact name of Registrant as specified in its charter)
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California
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94-2823865 |
(State or jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
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1951 Churn Creek Road |
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Redding, California
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96002 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (530) 224-3333
(None)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, No Par Value per share
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NASDAQ National Market |
Indicate by check mark if the registrant is a well-known seasoned issuer as
defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Exchange Act.
Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of
the Registrants knowledge, in definitive proxy or information statements incorporated by reference to Part III
of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See the definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act. (Check One)
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes o No þ
As of the (last day of the second fiscal quarter), the aggregate market value of
the registrants common stock held by non-affiliates of the registrant was
($Market value) based on the (closing sale price) (average bid and asked price) as
reported on the NASDQ National Market (National Association of Securities Dealers
Automated Quotation System National Market System).
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the last practicable date.
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Class |
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Outstanding at February 28, 2006 |
Common Stock, No par value per share
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8,662,896 |
DOCUMENTS INCORPORATED BY REFERENCE
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Document |
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Parts Into Which Incorporated |
Proxy Statement for the Annual Meeting of Stockholders
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Part III |
To be held May 16, 2006 (Proxy Statement) |
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Bank of Commerce Holdings Form 10-K
Table of Contents
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2
Documents Incorporated By Reference
Items numbered 10 (as to directors), 11 and 12 of Part III incorporate by reference
information from the Registrants Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the Registrants
2006 Annual Meeting of Shareholders. The 2006 Annual Meeting of Shareholders will be held
on Tuesday, May 16, 2006.
3
PART I
Item 1. BUSINESS
General
Bank of Commerce Holdings (the Holding Company) is a financial holding company (FHC) registered
under the Bank Holding Company Act of 1956, as amended, and was incorporated in California on
January 21, 1982 (under the name Redding Bancorp), for the purpose of organizing, as a wholly owned
subsidiary, Redding Bank of Commerce (the Bank). The Holding Company elected to change to a FHC
in 2000. As a financial holding company, the Holding Company is subject to the Financial Holding
Company Act and to supervision by the Board of Governors of the Federal Reserve System (FRB).
The Holding Companys principal business is to serve as a holding company for Redding Bank of
Commerce, Bank of Commerce Mortgage, a California corporation and for other banking or
banking-related subsidiaries which the Holding Company may establish or acquire (collectively the
Company). The Holding Company also has an unconsolidated subsidiary, Bank of Commerce Holdings
Trust. During the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware
statutory business trust, Bank of Commerce Holdings Trust (the grantor trust), which issued $5.0
million of guaranteed preferred beneficial interests in Bank of Commerce Holdings junior
subordinated debentures (the Trust Notes). These debentures qualify as Tier 1 capital under
Federal Reserve Board guidelines. The proceeds from the issuance of the Trust Notes were
transferred from the grantor trust to the Holding Company and from the Holding Company to the Bank
as surplus capital. The Trust Notes accrue and pay distributions on a quarterly basis at 3 month
London Interbank Offered Rate (LIBOR) plus 3.30%. The rate at December 31, 2005 was 7.45%. The
rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The final maturity on the
Trust Notes is March 18, 2033, and the debt allows for prepayment after five years on the quarterly
payment date. During the third quarter 2005, Bank of Commerce Holdings formed a wholly-owned
Delaware statutory business trust, Bank of Commerce Holdings Trust II (the grantor trust), which
issued $10.0 million of guaranteed preferred beneficial interests in Bank of Commerce Holdings
junior subordinated debentures (the Trust Notes). $5 million of the issuance will qualify as Tier
1 capital under Federal Reserve Board guidelines. $5 million of the proceeds from the issuance of
the Trust Notes were transferred from the grantor trust to the Holding Company and from the Holding
Company to the Bank as surplus capital and $5 million of the issuance is retained at the Holding
Company for investment purposes. The issuance is priced at a fixed rate for the first five years at
6.115%.
The Company will provide free of charge upon request, or through links to publicly available
filings accessed through its Internet website, the Companys annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, if any, as soon
as reasonably practical after such reports have been filed with the Securities and Exchange
Commission. The Internet addresses of the Company are www.reddingbankofcommerce.com,
www.rosevillebankofcommerce.com and www.sutterbankofcommerce.com. Additionally,
reports may be obtained through the Securities and Exchange Commissions website at
www.sec.gov.
The Bank was incorporated as a California banking corporation on November 25, 1981, and received
its certificate of authority to begin banking operations on October 22, 1982. The Bank operates
four full service branch facilities. The Bank established its first full service branch at 1177
Placer Street, Redding, California, and opened for business on October 22, 1982. On November 1,
1988, the Bank received a certificate of authority to establish and maintain a loan production
office in Citrus Heights, California. On September 1, 1998, the Bank relocated the loan production
office to 2400 Professional Drive in Roseville, California.
On March 1, 1994, the Bank received a certificate of authority to open a second full-service branch
at 1951 Churn Creek Road in Redding, California. On June 30, 2000, the Bank received a certificate
of authority to convert the loan production office in Roseville to a full service banking facility
under the name Roseville Bank of Commerce, a division of Redding Banking of Commerce.
On June 15, 2001, the Bank acquired the deposit liabilities of FirstPlus Bank at Citrus Heights,
California and has renamed the facility Roseville Bank of Commerce at Sunrise, a division of
Redding Bank of Commerce. On February 22, 2002, the Roseville Bank of Commerce at Eureka Road, a
division of Redding Bank of Commerce, relocated to its permanent location at 1504 Eureka Road,
Suite 100, Roseville, California.
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On March 18, 2004, RBC Mortgage Services, a wholly-owned subsidiary of the Holding Company, changed
its name to Bank of Commerce Mortgage (the Mortgage Company), an affiliate of Redding Bank of
Commerce. The principal business of the subsidiary is mortgage brokerage services. The subsidiary
has an affiliated business arrangement with the Bank of Walnut Creek (BWC Mortgage Services).
Under the terms of the agreement, BWC Mortgage Services underwrites or brokers mortgage products,
and manage the independent contractors, supporting staff and broker relationships with various
secondary market lenders. Bank of Commerce Mortgage in turn provides office space, equipment and
marketing support for the mortgage brokerage services. Bank of Commerce Mortgage, through this
agreement, offers a full array of single-family and multi-family residential real estate mortgages
including equity lines. Bank of Commerce Mortgage pays ten percent of gross premiums earned to BWC
Mortgage Services. On July 1, 2004, Bank of Commerce Mortgage relocated to its permanent location
at 1024 Mistletoe Lane, Redding, California.
On May 18, 2004, by majority shareholder vote, the Holding Company (Redding Bancorp) amended the
Articles of Incorporation to change the Companys name to Bank of Commerce Holdings. The new name
proves to be more reflective of the multiple financial holdings of the Company as well as more
geographically open to expansion opportunities.
On May 24, 2004 the Company was approved to list on the NASDAQ National Market under the trading
symbol BOCH (Bank of Commerce Holdings). The listing became live on June 15, 2004. On July 21,
2004, the Board of Directors declared a three-for-one stock split on the Companys common stock.
The decision to declare the stock split was intended to make it easier for our current and future
investors to enjoy ownership in our Company.
On August 26, 2005, the Company received approval from the Federal Deposit Insurance Corporation to
open a branch in the Yuba City market. The branch will be entitled Sutter Bank of Commerce, a
division of Redding Bank of Commerce. A lease has been secured for 950 Tharp Road, Suite 800, Yuba
City, California. The office is scheduled to open during the first quarter of 2006.
The Company plans to build an Administrative and Information Technology center during 2006. The
building will be approximately 12,000 square feet and will be built on property already owned by
the Company. The budget for the building is approximately $3.7 million.
Primary Market Areas
The Bank is principally supervised and regulated by the California Department of Financial
Institutions and the Federal Deposit Insurance Corporation. The Company operates in two distinct
markets. Redding Bank of Commerce has historically been the leading independent commercial bank in
Redding, California, and Shasta County, California. This market has been expanding, but is still
relatively small when compared to the greater Sacramento market, the location of Roseville Bank of
Commerce, a division of Redding Bank of Commerce. Management believes that the two markets
complement each other, with the Redding market providing the stability and the greater Sacramento
and Yuba Sutter markets providing growth opportunities.
Products and Services
Through the Bank and mortgage subsidiaries, the Company provides a wide range of financial services
and products. The services offered by the Bank include those traditionally offered by commercial
banks of similar size and character in California. Products such as checking, interest-bearing
checking (NOW) and savings accounts, money market deposit accounts, commercial, construction, and
term loans, travelers checks, safe deposit boxes, collection services and electronic banking
activities. The primary focus of the Bank is to provide services to the business and professional
community of its major market area, including Small Business Administration loans, payroll and
accounting packages, benefit administration and billing services. The Bank currently does not
offer trust services or international banking services. The services offered by the Mortgage
Company include single and multi-family residential new financing, refinancing and equity lines of
credit.
Most of the Banks customers are small to medium sized businesses, professionals and other
individuals with medium to high net worth, and most of the Banks deposits are obtained from such
customers. The Bank emphasizes servicing the needs of local businesses and professionals and
individuals requiring specialized services. The primary business strategy of the Bank is to focus
on its lending activities. The Banks principal lines of lending are (i) commercial, (ii) real
estate construction and (iii) commercial real estate.
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The majority of the loans of the Bank are direct loans made to individuals and small
businesses in the major market area of the Bank. The Mortgage Company provides residential real
estate new financing, refinancing and equity lines of credit, 100% sold in the secondary market.
See -Risk Factors That May Affect Results-Dependence on Real Estate. A relatively small portion
of the loan portfolio of the Bank consists of loans to individuals for personal, family or
household purposes. The Bank accepts the following as collateral for loans real estate: listed and
unlisted securities, savings and time deposits, automobiles, machinery and equipment and other
general business assets such as accounts receivable and inventory.
The commercial loan portfolio of the Bank consists of a mix of revolving credit facilities and
intermediate term loans. The loans are generally made for working capital, asset acquisition,
business-expansion purposes, and are generally secured by a lien on the borrowers assets. The
Bank also makes unsecured loans to borrowers who meet the Banks underwriting criteria for such
loans. The Bank manages its commercial loan portfolio by monitoring its borrowers payment
performance and their respective financial condition and makes periodic and appropriate
adjustments, if necessary, to the risk grade assigned to each loan in the portfolio. The primary
sources of repayment of the commercial loans of the Bank are the borrowers conversion of
short-term assets to cash and operating cash flow. The net assets of the borrower or guarantor
and/or the liquidation of collateral are usually identified as a secondary source of repayment.
The principal factors affecting the Banks risk of loss from commercial lending include each
borrowers ability to manage its business affairs and cash flows, local and general economic
conditions and real estate values in the Banks service area. The Bank manages risk through its
underwriting criteria, which includes strategies to match the borrowers cash flow to loan
repayment terms, and periodic evaluations of the borrowers operations. The Banks evaluations of
its borrowers are facilitated by managements knowledge of local market conditions and periodic
reviews by a consultant of the credit administration policies of the Bank.
The real estate construction loan portfolio of the Bank consists of a mix of commercial and
residential construction loans, which are principally secured by the underlying projects. The real
estate construction loans of the Bank are predominately made for projects, which are intended to be
owner occupied. The Bank also makes real estate construction loans for speculative projects. The
principal sources of repayment of the Banks construction loans are sale of the underlying
collateral or permanent financing provided by the Bank or another lending source. The principal
risks associated with real estate construction lending include project cost overruns that absorb
the borrowers equity in the project and deterioration of real estate values as a result of various
factors, including competitive pressures and economic downturns.
See Risk Factors That May Affect Results-Lending Risks Associated with Commercial Banking and
Construction Activities. The Bank manages its credit risk associated with real estate construction
lending by establishing maximum loan-to-value ratios on projects on an as-completed basis,
inspecting project status in advance of controlled disbursements and matching maturities with
expected completion dates. Generally, the Bank requires a loan-to-value ratio of no more than 80%
on single-family residential construction loans.
The commercial and construction loan portfolio of the Bank consists of loans secured by a variety
of commercial and residential real property. The Mortgage Company makes real estate mortgage loans
for both owner-occupied properties and investor properties. The Mortgage Company underwrites and
sells the residential real estate loan directly in the secondary market, servicing included. The
Bank does not provide for warehouse funding.
The specific underwriting standards of the Bank and methods for each of its principal lines of
lending include industry-accepted analysis and modeling and certain proprietary techniques. The
Banks underwriting criteria is designed to comply with applicable regulatory guidelines, including
required loan-to-value ratios. The credit administration policies of the Bank contain mandatory
lien position and debt service coverage requirements, and the Bank generally requires a guarantee
from the owners of its private corporate borrowers.
6
Government Supervision and Regulation
The following discussion describes the elements of an extensive regulatory framework applicable to
financial holding companies and banks and specific information about the Holding Company and its
subsidiaries. Federal regulation of banks, bank holding companies and financial holding companies
is intended primarily for the protection of depositors and the Bank Insurance Fund rather than for
the protection of stockholders and creditors.
General
The Holding Company is a financial holding company under the Gramm-Leach-Bliley Act and subject to
the Financial Holding Company Act (FHCA). The Holding Company reports to, registers with, and
may be examined by the Board of Governors of the Federal Reserve Bank (FRB). The FRB also has
the authority to examine the Holding Companys subsidiaries. The Bank is subject to regulation,
supervision and examination by the Federal Deposit Insurance Corporation (the FDIC) and the
California Department of Financial Institutions (DFI). In addition to banking laws, regulations
and regulatory agencies, the Holding Company and its subsidiaries and affiliates are subject to
various other laws and regulations and regulation by other regulatory agencies, all of which
directly or indirectly affect the operations and management of the Holding Company and its ability
to make distributions to stockholders.
A financial holding company, and the companies under its control, are permitted to engage in
activities considered to be financial in nature as defined by the Gramm-Leach-Bliley Act and the
Federal Reserve Board interpretations (including, without limitation, insurance and securities
activities), and therefore may engage in a broader range of activities than permitted for bank
holding companies and their subsidiaries. A financial holding company may engage directly or
indirectly in activities considered financial in nature, either de novo or by acquisition, provided
the financial holding company gives the Federal Reserve Board after-the-fact notice of the new
activities.
Dividends
The FRB generally prohibits a financial holding company from declaring or paying a cash dividend
which would impose undue pressure on the capital of subsidiary banks or would be funded only
through borrowing or other arrangements that might adversely affect a bank holding companys
financial position. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
prohibits insured depository institutions from paying management fees to any controlling persons
or, with certain limited exceptions, making capital distributions, including dividends, if, after
such transaction, the institution would be undercapitalized.
In addition to the restrictions imposed under federal law, banks chartered under California law
generally may only pay cash dividends to the extent such payments do not exceed the lesser of
retained earnings of the bank or the banks net income for its last three fiscal years (less any
distributions to stockholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the
Commissioner in an amount not exceeding the greatest of the banks retained earnings, the banks
net income for its last fiscal year, or the banks net income for its current fiscal year.
Regulators also have authority to prohibit a depository institution from engaging in business
practices which are considered to be unsafe or unsound, possibly including payment of dividends or
other payments under certain circumstances even if such payments are not expressly prohibited by
statute. The FRBs policy is that a bank holding company should not continue its existing rate of
cash dividends on its common stock unless its net income is sufficient to fully fund each dividend
and its prospective rate of earnings retention appears consistent with its capital needs, asset
quality and overall financial condition.
Interstate Banking
A financial holding company may acquire banks in states other than its home state without
regard to the permissibility of such acquisitions under state law, but subject to any state
requirement that the bank has been organized and operating for a minimum period of time, not to
exceed five years, and the requirement that the bank holding company, prior to or following the
proposed acquisition, controls no more than 10% of the total amount of deposits of insured
depository institutions in the United States and no more than 30% of such deposits in that state
(or such lesser or greater amount set by state law). Banks may also merge across state lines,
therefore creating interstate branches. Furthermore, a bank is now able to open new branches in a
state in which it does not already have banking operations if the laws of such state permit such de
novo branching.
7
Capital Standards
In the United States of America, banks, thrifts and bank holding companies are subject to
minimum regulatory capital requirements. Specifically, U.S. banking organizations must maintain a
minimum leverage ratio and two minimum risk-based ratios. The leverage ratio measures regulatory
capital as a percentage of total on-balance-sheet assets as reported in accordance with accounting
principles generally accepted in the United States of America (GAAP). The risk-based ratios measure
regulatory capital as a percentage of both on- and off-balance-sheet credit exposures with some
gross differentiation based on perceived credit risk. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of
several risk adjustment percentages, which range from 0% for assets with low credit risk, such as
certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as
certain loans.
The current U.S. risk-based capital requirements are based on an internationally agreed
framework for capital measurement that was developed by the Basel Committee on Banking Supervision
(BSC) in 1988. The international framework (the 1988 Accord) accomplished several important
objectives. It strengthened capital levels at large, internationally active banks and fostered
international consistency and coordination. The 1988 Accord also reduced disincentives for banks to
hold liquid, low risk assets. By requiring banks to hold capital against off-balance-sheet
exposures, the 1988 Accord represented a significant step forward for regulatory capital
measurement. The federal banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets and off-balance-sheet items of 8%, and a minimum ratio of Tier 1 capital to
adjusted average risk-adjusted assets and off-balance-sheet items of 4%. The Company exceeds the
minimum requirements. Over the past 15 years the worlds financial system has become increasingly
more complex and the BSC has been working for several years to develop a new regulatory capital
framework that recognizes new developments in financial products, incorporates advances in risk
measurement and management practices, and more precisely assesses capital charges in relation to
risk (the New Accord). The BSC expects the New Accord would have an effective date for
implementation of December 31, 2006.
As of December 31, 2005, the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action.
Overview of the New Accord
The New Accord encompasses three elements: minimum regulatory capital requirements,
supervisory review and market discipline. Under the first element, a banking organization must
calculate capital requirements to credit risk, operational risk and market risk. The New Accord
does not change the definition of what qualifies as regulatory capital, the minimum risk-based
capital ratio, or the methodology for determining capital charges for market risk. The New Accord
does provide several methodologies for determining capital requirements for both credit and
operational risk. For credit risk there are two general approaches; the standardized approach
(based on the 1988 Accord) and the internal ratings-based (IRB) approach, which uses the
institutions internal estimates of key risk drivers to derive capital requirements.
The New Accord provides three methodologies for determining capital requirements for
operational risk: the basic indicator approach, the standardized approach, and the advanced
measurement approaches (AMA). Under the first two methodologies, capital requirements for
operational risk are fixed percentages of specified, objective risk measures (for example, gross
income.) The AMA provides the flexibility for an institution to develop its own individualized
approach for measuring operational risk, subject to supervisory oversight.
The second pillar of the New Accord, supervisory review, highlights the need for banking
organizations to assess their capital adequacy positions relative to overall risk (rather than to
the minimum capital requirement), and the need for supervisors to review and take appropriate
actions in response to those assessments. The third pillar of the New Accord imposes public
disclosure requirements on institutions that are intended to allow market participants to assess
key information about an institutions risk profile and its associated level of capital.
In order for a financial holding company to qualify as well-run, both it and the insured
depository institutions that it controls must meet the well-capitalized and well-managed
criteria set forth in Regulation Y. To qualify as well-capitalized, the bank must, on a
consolidated basis: (i) maintain a total risk-based capital ratio of 10% or greater, (ii) maintain
a Tier 1 risk-based capital ratio of 6% or greater and (iii) not be subject to any order by the FRB
to meet a specified capital level. Its lead insured depository institution must be
well-capitalized (as that term is defined in the capital adequacy regulations of the applicable
bank regulator), 80% of the total risk-weighted assets held by its insured depository institutions
must be held by institutions that are well-capitalized, and none of its insured depository
institutions may be undercapitalized.
8
To qualify as well-managed: (i) each of its lead depository institutions and its depository
institutions holding 80% of the total risk-weighted assets of all its depository institutions at
their most recent examination or review must have received a composite rating, rating for
management and rating for compliance which were at least satisfactory, (ii) none of the bank
holding companys depository institutions may have received one of the two lowest composite ratings
and (iii) neither the bank holding company nor any of its depository institutions during the
previous 12 months may have been subject to a formal enforcement order or action.
State Regulation and Supervision
The Bank is a California chartered bank insured by the Federal Deposit Insurance Corporation (the
FDIC), and as such is subject to regulation, supervision and regular examination by the
California Department of Financial Institutions (DFI) and the FDIC. As a non-member of the
Federal Reserve System, the primary federal regulator of the Holding Company is the Federal Reserve
Board. The regulations of these agencies affect most aspects of the Banks business and prescribe
permissible types of loans and investments, the amount of required reserves, requirements for
branch offices, the permissible scope of the Banks activities and various other requirements. The
Bank is also subject to applicable provisions of California law, insofar as such provisions are not
in conflict with or preempted by federal banking law. In addition, the Bank is subject to certain
regulations of the FRB dealing primarily with check-clearing activities, establishment of banking
reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and Equal Credit
Opportunity (Regulation B).
Under California law, a state chartered bank is subject to various restrictions on, and
requirements regarding, its operations and administration including the maintenance of branch
offices and automated teller machines, capital and reserve requirements, deposits and borrowings,
shareholder rights and duties, and investment and lending activities. Whenever it appears that the
contributed capital of a California bank is impaired, the Commissioner is required to order the
bank to correct such impairment. If a bank is unable to correct the impairment, the bank is
required to levy and collect an assessment upon its common shares. If such assessment becomes
delinquent, the common shares are to be sold by the bank.
Changes in Regulations
Proposals to change laws and regulations governing the banking industry are frequently introduced
in Congress, in the state legislatures and before the various bank regulatory agencies. The
likelihood and timing of any proposals or legislation and the impact they might have on the Holding
Company and its subsidiaries cannot be determined at this time.
Prompt Corrective Action and Other Enforcement Mechanisms
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires each federal
banking agency to take prompt corrective action to resolve the problems of insured depository
institutions, including but not limited to those that fall below one or more prescribed minimum
capital ratios. The law required each federal banking agency to promulgate regulations defining
the following five categories in which an insured depository institution will be placed, based on
the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
As of December 31, 2005, the most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. Under the
prompt corrective action provisions of FDICIA, an insured depository institution generally will be
classified in the following categories based on the capital measures indicated below:
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Well
capitalized - Bank only |
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Adequately
capitalized |
Total risk-based capital of 10%;
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Total risk-based capital of 8%; |
Tier 1 risk-based capital of 6%; and
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Tier 1 risk-based capital of 4%; and |
Leverage ratio of 5%.
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Leverage ratio of 4%. |
9
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Undercapitalized |
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Significantly undercapitalized |
Total risk-based capital less than 8%;
|
|
Total risk-based capital less than 6%; |
Tier 1 risk-based capital less than 4%; or
|
|
Tier 1 risk-based capital less than 3%; or |
Leverage ratio less than 4%.
|
|
Leverage ratio less than 3%. |
|
|
|
Critically undercapitalized |
|
|
Tangible equity to total assets less than 2%.
|
|
|
An institution that, based upon its capital levels, is classified as well capitalized,
adequately capitalized or undercapitalized may be treated as though it were in the next lower
capital category if the appropriate federal banking agency, after notice and opportunity for
hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository institution is
subject to more restrictions.
The federal banking agencies, however, may not treat an institution as critically
undercapitalized unless its capital ratio actually warrants such treatment. If an insured
depository institution is undercapitalized, it will be closely monitored by the appropriate federal
banking agency. Undercapitalized institutions must submit an acceptable capital restoration plan
with a guarantee of performance issued by the holding company. Further restrictions and sanctions
are required to be imposed on insured depository institutions that are critically undercapitalized.
The most important additional measure is that the appropriate federal banking agency is required
to either appoint a receiver for the institution within 90 days, or obtain the concurrence of the
FDIC in another form of action.
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and required federal banking
regulators to adopt overall safety and soundness standards for depository institutions related to
internal control, loan underwriting, documentation, and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of
brokered deposits, limits the aggregate extensions of credit by a depository institution to an
executive officer, director, principal shareholder or related interest, and reduces deposit
insurance coverage for deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
The federal banking agencies may require an institution to submit to an acceptable compliance plan
as well as have the flexibility to pursue other more appropriate or effective courses of action
given the specific circumstances and severity of an institutions noncompliance with one or more
standards.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting obligations involving home
mortgage lending operations and Community Reinvestment Act (CRA) activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate-income neighborhoods. In
addition to substantive penalties and corrective measures that may be required for a violation of
certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA
into account when regulating and supervising other activities.
Recently Enacted Accounting Rules
Statement of Financial Accounting Standards No. 123 (revised 2004) In December 2004 the FASB
revised SFAS No. 123, Accounting for Stock Based Compensation. This statement supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance.
The Statement establishes standards for the accounting of transactions in which an entity exchanges
its equity instruments for goods and services.
It also addresses transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entitys equity instruments or that may be settled
by the issuance of those equity instruments. The Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions. This
Statement does not change the accounting guidance for share-based payment transactions with parties
other than employees provided in Statement No. 123 as originally issued and EITF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.
10
The Statement requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award. The
cost will be recognized over the period during which an employee is required to provide service in
exchange for the award the requisite service period (usually the vesting period). No compensation
cost is recognized for equity instruments for which employees do not render the requisite service.
A public entity will initially measure the cost of employee services received in exchange for an
award of liability instruments based on its current fair value; the fair value of that award will
be remeasured subsequently at each reporting date through the settlement date. Changes in fair
value during the requisite service period will be recognized as compensation cost over that period.
The grant-date fair value of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those instruments. If an equity
award is modified after the grant date, incremental compensation cost will be recognized in amount
equal to the excess of the fair value of the modified award over the fair value of the original
award immediately before the modification.
The notes to financial statements of both public and nonpublic entities will disclose information
to assist users of financial information to understand the nature of share-based payment
transactions and the effects of those transactions on the financial statements.
This Statement is effective for public entities that do not file as small business issuers as of
the beginning of the first interim or annual reporting period that begins after January 2006. The
Statement applies to all awards granted after the required effective date and to awards modified,
repurchased or cancelled after that date. The cumulative effect of initially applying this
Statement, if any, will be recognized as of the required effective date. Under the transition
method, compensation cost is recognized on or after the required effective date for the portion of
outstanding awards, for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated under Statement No. 123 for either recognition or
pro forma disclosures. The Company will adopt the fair value based method of accounting for stock
based employee compensation effective for financial statements after January 1, 2006. Management
believes that the adoption of this rule will not have a material impact on the Companys results of
operations or financial condition.
On March 30, 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations an Interpretation of FASB Statement No.
143 (FIN 47). FIN 47 was issued to address diverse accounting practices that developed with respect
to the timing of liability recognition for legal obligations associated with the retirement of a
tangible long-lived asset when the timing and/or method of settlement of the obligation are
conditional on a future event. FIN 47 requires an entity to recognize a liability for the fair
value of a conditional asset retirement obligation when incurred if the liabilitys fair value can
be reasonably estimated. FIN 47 is effective no later than December 31, 2005. Management believes
that the adoption of this rule will not have a material impact on the Companys results of
operations or financial condition.
On May 5, 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (FAS
154), replacing APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements. Unless specified in an accounting standard, FAS
154 requires retrospective application to prior periods financial statements for changes in
accounting principle and corrections of errors. APB Opinion 20 previously provided that most
changes in accounting principle be recognized by including in net income the cumulative effect of
changing to the new principle in the period of adoption. Management will adopt the provisions of
FAS 154 effective January 1, 2006.
On August 11, 2005, the FASB issued a revised Exposure Draft, Accounting for Transfers of Financial
Assets. The proposed statement seeks to clarify the derecognition requirements for financial assets
that were developed initially in FASB Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and revised in Statement 140, and to change
and simplify the initial measurement of interest related to transferred financial assets held by a
transferor. The proposed changes principally apply to securitizations and loan participations.
11
Competition
The commercial banking business in which the Company engages in is highly competitive. Generally,
the lines of activity and markets served involve competition with other banks, thrifts, credit
unions and other nonbank financial institutions, such as investment banking firms, investment
advisory firms, brokerage firms, investment companies and insurance entities which offer financial
services, located both domestically and through alternative deliver channels such as the Internet.
The methods of competition center around various factors, such as customer services, interest rates
on loans and deposits, lending limits and customer convenience.
The mortgage brokerage business in which the Company engages in is highly competitive. The mortgage
brokerage business competes with other banks, thrifts, government agencies, mortgage brokers and
other nonbank organizations offering mortgage banking services. Among the competitive advantages,
major banks have an ability to finance wide ranging advertising campaigns and to allocate their
securities into securities of higher yield and demand. Such institutions offer certain services
such as trust services and international banking services that are not offered directly by the Bank
(but are offered indirectly through correspondent relationships). Because of their greater total
capitalization, major banks have substantially higher legal lending limits than the Bank.
In order to compete with major banks and other competitors in its primary service areas, the
Company relies upon the experience of its executive and senior officers in serving business
clients, and upon its specialized services, local promotional activities and the personal contacts
made by its officers, directors and employees. For customers whose loan demand exceeds the
Companys legal lending limit, the Company may arrange for such loans on a participation basis with
correspondent banks. Competitive pressures in the banking industry significantly increase changes
in the interest rate environment, reducing net interest margins, and less than favorable economic
conditions can result in a deterioration of credit quality and an increase in the provisions for
loan losses.
Employees
As of February 1, 2006, the Company employed 125 full-time equivalent employees. Of these
employees, 29 were employed in the Roseville market and 87 were in the Redding market. None of the
employees within the Company are subject to a collective bargaining agreement. Management considers
its employee relations to be excellent.
12
ITEM 1A.
Forward Looking Statements and Risk Factors That May Affect Results
This report includes forward-looking statements within the meaning of the Securities Exchange
Act of 1934 (the Exchange Act) and the Private Securities Litigation Reform Act of 1995. These
statements are based on managements beliefs and assumptions, and on information available to
management as of the date of this document. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company set forth under the
heading Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements also include statements in which words such as expects, anticipates,
intend, plan, believes, estimate, consider or similar expressions or conditional verbs
such as will, should, would and could are intended to identify such forward looking
statements.. Forward-looking statements are not guarantees of future performance. They involve
risks, uncertainties and assumptions, including the risks discussed under the heading Risk Factors
That May Affect Results and elsewhere in this report. The Companys actual future results and
shareholder values may differ materially from those anticipated and expressed in these
forward-looking statements. Many of the factors that will determine these results and values,
including those discussed under the heading Risk Factors That May Affect Results, are beyond the
Companys ability to control or predict. Investors are cautioned not to put undue reliance on any
forward-looking statements. In addition, the Company does not have any intention or and assumes no
obligation to update forward-looking statements after the date of the filing of this report, even
if new information, future events or other circumstances have made such statements incorrect or
misleading. Except as specifically noted herein all references to the Company refer to Bank of
Commerce Holdings, a California corporation, and its consolidated subsidiaries.
Overview
As a financial holding company, our earnings are significantly affected by general business and
economic conditions. These conditions include short-term and long-term interest rates, inflation,
monetary supply, fluctuations in both debt and equity capital markets, and the strength of the
United States economy and local economies in which we operate. For example, an economic downturn,
increase in unemployment, or other events that negatively impact household and/or corporate incomes
could decrease the demand for the Companys loan and non-loan products and services and increase
the number of customers who fail to pay interest or principal on their loans. Geopolitical
conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United
States or other governments in response to acts or threats of terrorism and our military conflicts
including the aftermath of the war with Iraq could impact business conditions in the United States.
The Board of Governors of the Federal Reserve System regulates the supply of money and credit in
the United States. Its policies determine in large part our cost of funds for lending and investing
and the return we earn on those loans and investments, both of which impact our net interest
margin, and can materially affect the value of financial instruments we hold. Its policies can also
affect our borrowers, potentially increasing the risk of failure to repay their loans. Changes in
Federal Reserve Board policies are beyond our control and hard to predict or anticipate.
We operate in a highly competitive industry that could become even more competitive because of
legislative, regulatory and technological changes and continued consolidation. Banks, securities
firms and insurance companies can now merge creating a financial holding company that can offer
virtually any type of financial service, including banking, securities underwriting, insurance
(agency and underwriting) and merchant banking. Technology has lowered barriers to entry and made
it possible for non-banks to offer products and services traditionally provided by banks, such as
automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory
constraints and some have lower cost structures.
The holding company, subsidiary bank and nonbank subsidiary are heavily regulated at the federal
and state levels. This regulation is intended to protect depositors, federal deposit insurance
funds and the banking system as a whole, not investors. Congress and state legislatures and federal
and state regulatory agencies continually review banking laws, regulations and policies for
possible changes. Changes to statutes, regulations or regulatory policies including changes in
interpretation and implementation could affect us in substantial and unpredictable ways including
limiting the types of financial services and products we may offer.
Our failure to comply with the laws, regulations or policies could result in sanctions by
regulatory agencies and damage our reputation.
13
Our success depends, in part, on our ability to adapt our products and services to evolving
industry standards. There is increasing pressure on financial services companies to provide
products and services at lower prices. This can reduce our net interest margin and revenues from
fee-based products and services. In addition, the widespread adoption of new technologies,
including internet-based services, could require us to make substantial expenditures to modify or
adapt our existing products and services. Our success depends, in large part, on our ability to
attract and retain key people. Competition for the best people can be intense.
Lending Risks Associated with Commercial Banking and Construction Activities
The business strategy of the Company is to focus on commercial, single family and multi-family real
estate loans, construction loans and commercial business loans. Loans secured by commercial real
estate are generally larger and involve a greater degree of credit and transaction risk than
residential mortgage (one-to-four family) loans. Because payments on loans secured by commercial
and multi-family real estate properties are often dependent on successful operation or management
of the underlying properties, repayment of such loans may be subject to a greater extent to the
then prevailing conditions in the real estate market or the economy. Moreover, real estate
construction financing is generally considered to involve a higher degree of credit risk than
long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan
is dependent largely upon the accuracy of the initial estimate of the propertys value at
completion of construction or development compared to the estimated cost (including interest) of
construction. If the estimate of value proves to be inaccurate, the Company may be confronted with
a project which, when completed, has a value which is insufficient to assure full repayment of the
construction loan. Although the Company manages lending risks through its underwriting and credit
administration policies, no assurance can be given that such risks would not materialize, in which
event the Companys financial condition, results of operations, cash flows and business prospects
could be materially adversely affected.
Dependence on Real Estate
At December 31, 2005, approximately 68% of the loans of the Company were secured by real estate.
The value of the Companys real estate collateral has been, and could in the future be adversely
affected by any economic recession and any resulting adverse impact on the real estate market in
California. See -Economic Conditions and Geographic
Concentration.
The Companys primary lending focus has historically been commercial real estate, commercial
lending and, to a lesser extent, construction lending. At December 31, 2005, commercial real
estate and construction loans comprised approximately 39% and 29%, respectively, of the total loans
in the portfolio of the Company. At December 31, 2005, all of the Companys real estate mortgage,
real estate construction loans, and commercial real estate loans, were secured fully or in part by
deeds of trust on underlying real estate. The Companys dependence on real estate increases the
risk of loss in the loan portfolio of the Company and its holdings of other real estate owned if
economic conditions in California deteriorate in the future. Deterioration of the real estate
market in California could have a material adverse effect on the Companys business, financial
condition and results of operations. See -Economic Conditions
and Geographic Concentration.
Risks Specific to Operations in California
Our operations are located entirely in the State of California, which in recent years has
experienced economic disruptions that are unique to the state. The fiscal and political
uncertainty surrounding the state governments financial condition, for example may have a
material adverse effect on our customers businesses or on our business, financial condition and
results of operations.
14
Interest Rate Risk
The income of the Company is highly dependent on interest rate differentials and the resulting
net interest margins (i.e., the difference between the interest rates earned on the Banks
interest-earning assets such as loans and securities, and the interest rates paid on the Banks
interest-bearing liabilities such as deposits and borrowings). These rates are highly sensitive to
many factors, which are beyond the Companys control, including general economic conditions,
inflation, recession and the policies of various governmental and regulatory agencies, in
particular, the FRB. Because of the Companys practice of using variable rate pricing and
noninterest bearing demand deposit accounts the Company is asset sensitive. As a result, the
Company is generally adversely affected by declining interest rates. In addition, changes in
monetary policy, including changes in interest rates, influence the origination of loans, the
purchase of investments and the generation of deposits and affect the rates received on loans and
securities and paid on deposits, which could have a material adverse effect on the Companys
business, financial condition and results of operations. See Quantitative and Qualitative
Disclosure about Market Risk.
Potential Volatility of Deposits
At December 31, 2005, time certificates of deposit in excess of $100,000 represented approximately
25% of the dollar value of the total deposits of the Company. As such, these deposits are
considered volatile and could be subject to withdrawal. Withdrawal of a material amount of such
deposits could adversely affect the liquidity of the Company, profitability, business prospects,
results of operations and cash flows. The Company monitors activity of volatile liability deposits
on a quarterly basis. Approximately $53.0 million of the $95.6 million in time certificates of
deposit over $100,000 act as core deposits with over five years history of rollover with the
Company.
Dividends
Because the Company conducts no other significant activity than the management of its investment in
the Bank and Mortgage Company, the Company is dependent on these subsidiaries for income. The
ability of the Bank and Mortgage Company to pay cash dividends in the future depends on the
profitability, growth and capital needs of the Bank and Mortgage Company. In addition, the
California Financial Code restricts the ability of the Bank to pay dividends. No assurance can be
given that the Company or the Bank will pay any dividends in the future or, if paid, such dividends
will not be discontinued.
Government Regulation and Legislation
The Company and the Bank are subject to extensive state and federal regulation, supervision and
legislation, which govern almost all aspects of the operations of the Company and the Bank. The
business of the Company is particularly susceptible to being affected by the enactment of federal
and state legislation which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities or enhancing the competitive position of other financial
institutions. Such laws are subject to change from time to time and are primarily intended for the
protection of consumers, depositors and the deposit insurance funds and not for the protection of
shareholders of the Company. The Company cannot predict what effect any presently contemplated or
future changes in the laws or regulations or their interpretations would have on the business and
prospects of the Company, but it could be material and adverse. See -Supervision and Regulation.
Economic Conditions and Geographic Concentration
The Companys operations are located and concentrated in California, particularly the counties of
El Dorado, Placer, Shasta and Sacramento, and are likely to remain so for the foreseeable future.
At December 31, 2005, approximately 68% of the Banks loan portfolio consisted of real estate
related loans, all of which were related to collateral located in California. A change in
California economic and business conditions may adversely affect the performance of these loans.
Deterioration in economic conditions could have a material adverse effect on the quality of the
loan portfolio of the Bank and the demand for its products and services. In addition, during
periods of economic slowdown or recession, the Bank may experience a decline in collateral values
and an increase in delinquencies and defaults. A decline in collateral values and an increase in
delinquencies and defaults increase the possibility and severity of losses. California real estate
is also subject to certain natural disasters, such as earthquakes, floods and mudslides, which are
typically not covered by the standard hazard insurance policies maintained by borrowers. Uninsured
disasters may make it difficult or impossible for borrowers to repay loans made by the Company.
15
Reliance on Key Employees and Others
As of February 1, 2006, the Company employed 125 employees. The Company considers employee
relations to be excellent. A collective bargaining group represents none of the employees of the
Company or its subsidiaries. Failure of the Company to attract and retain qualified personnel could
have an adverse effect on the Companys business, financial condition and results of operations.
The Company does maintain life insurance with respect to two of its officers with regard to a
salary continuation plan.
Adequacy of Allowance for Loan and Lease Losses (ALLL)
The Companys allowance for loan and lease losses was approximately $4.3 million, or 1.17% of total
loans at December 31, 2005. Material future additions to the allowance for loan losses might be
necessary if material adverse changes in economic conditions occur and the performance of the loan
portfolio of the Company deteriorates. In addition, future additions to the Companys allowance
for loan and lease losses on other real estate owned may also be required in order to reflect
changes in the markets for real estate in which the Companys other real estate owned is located
and other factors which may result in adjustments which are necessary to ensure that the Companys
foreclosed assets are carried at the lower of cost or fair value, less estimated costs to dispose
of the properties. Moreover, the FDIC and the DFI, as an integral part of their examination
process, periodically review the Companys allowance for loan and lease losses and the carrying
value of its assets. The Bank was most recently examined by the DFI in this regard during the
first quarter of 2005. Increases in the provisions for loan losses and foreclosed assets could
adversely affect the Banks financial condition and results of operations. See Managements
Discussion and Analysis of Financial Condition and Results of Operations-Asset Quality and
Managements Discussion and Analysis of Financial Condition and Results of Operations-Allowance
for Loan and Lease Losses (ALLL).
Certain Ownership Restrictions under California and Federal Law
Federal law prohibits a person or group of persons acting in concert from acquiring control of
a bank holding company unless the FRB has been given 60 days prior written notice of such proposed
acquisition and within that time period the FRB has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days, the period during which such a disapproval may
be issued. An acquisition may be made before the expiration of the disapproval period if the FRB
issues written notice of its intent not to disapprove the action. Under a rebuttal presumption
established by the FRB, the acquisition of more than 10% of a class of voting stock of a bank with
a class of securities registered under Section 12 of the Exchange Act (such as the common stock),
would, under the circumstances set forth in the presumption, constitute the acquisition of control.
In addition, any company would be required to obtain the approval of the FRB under the BHCA,
before acquiring 25% (5% in the case of an acquiror that is, or is deemed to be, a bank holding
company) or more of the outstanding shares of the Companys common stock, or such lesser number of
shares as constitute control. See -Supervision and Regulation-Regulation and Supervision of Bank
Holding Companies.
Under the California Financial Code, no person shall, directly or indirectly, acquire control of a
California licensed bank or a bank holding company unless the Commissioner has approved such
acquisition of control. A person would be deemed to have acquired control of the Company and the
Bank under this state law if such person, directly or indirectly, has the power (i) to vote 25% or
more of the voting power of the Company or (ii) to direct or cause the direction of the management
and policies of the Company. For purposes of this law, a person who directly or indirectly owns or
controls 10% or more of the common stock would be presumed to direct or cause the direction of the
management and policies of the Company and thereby control the Company.
Shares Eligible for Future Sale
As of February 28, 2006, the Company had 8,662,896 shares of Common Stock outstanding, of which
5,712,008 shares are eligible for sale in the public market without restriction and 2,950,888
shares are eligible for sale in the public market pursuant to Rule 144 under the Securities Act of
1933, as amended (the Securities Act). Future sales of substantial amounts of the Companys
common stock, or the perception that such sales could occur, could have a material adverse effect
on the market price of the common stock. In addition, options to acquire 608,316 shares of the
issued and outstanding shares of common stock at exercise prices ranging from $2.75 to $11.59 have
been issued to directors and certain employees of the Company under the Companys 1998 Stock Option
Plan. No prediction can be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price of the Companys common
stock.
16
Technology and Computer Systems
Advances and changes in technology can significantly affect the business and operations of the
Company. The Company faces many challenges including the increased demand for providing computer
access to bank accounts and the systems to perform banking transactions electronically. The
Companys ability to compete depends on its ability to continue to adapt its technology on a timely
and cost-effective basis to meet these requirements. In addition, the Companys business and
operations are susceptible to negative impacts from computer system failures, communication and
energy disruption and unethical individuals with the technological ability to cause disruptions or
failures of the Companys data processing systems.
During 2006 the Company intends to build an Administrative and Information Technology center on
property already owned adjacent to the Churn Creek office. The budget for this project is
approximately $3.7 million.
Environmental Risks
The Company, in its ordinary course of business, acquires real property securing loans that are in
default, and there is a risk that hazardous substance or waste, contaminants or pollutants could
exist on such properties. The Company may be required to remove or remediate such substances from
the affected properties at its expense, and the cost of such removal or remediation may
substantially exceed the value of the affected properties or the loans secured by such properties.
Furthermore, the Company may not have adequate remedies against the prior owners or other
responsible parties to recover its costs. Finally, the Company may find it difficult or impossible
to sell the affected properties either before or following any such removal. In addition, the
Company may be considered liable for environmental liabilities concerning its borrowers
properties, if, among other things, it participates in the management of its borrowers operations.
The occurrence of such an event could have a material adverse effect on the Companys business,
financial condition, results of operations and cash flows.
Dilution
The Company has issued options to purchase shares of the Companys common stock at prices equal to
85% to 100% of the fair market value of the Companys Common Stock on the date of grant. As of
December 31, 2005, the Company had outstanding options to purchase an aggregate of 608,316 shares
of Common Stock at exercise prices ranging from $2.75 to $11.59 per share, or a weighted average
exercise price per share of $5.20. To the extent such options are exercised, stockholders of the
Company will experience dilution.
ITEM 1(b). UNRESOLVED STAFF COMMENTS
None to report.
17
Item 2. PROPERTIES
The Companys principal offices and the Banks main office are housed in a two-story building
with approximately 21,000 square feet of space located at 1951 Churn Creek Road, Redding,
California, 96002. The Bank owns the building and the 1.25 acres of land on which the building is
situated. The Bank also owns the land and building located at 1177 Placer Street, Redding,
California, 96001, in which the Bank uses approximately 11,650 square feet of space for its banking
operations.
The Companys Roseville Bank of Commerce at Eureka office is located on the first floor of a
three-story building with approximately 8,550 square feet of space located at 1504 Eureka Road,
Roseville, California. The Company leases the space pursuant to a triple net lease expiring on
August 1, 2011. The Companys Roseville Bank of Commerce at Sunrise office is a free standing
building with approximately 4,982 square feet of space located at 6950 Sunrise Boulevard, Citrus
Heights, California. The Company subleases the space from Wells Fargo Bank expiring on March 5,
2009.
The Companys Mortgage division is located in a free standing building with approximately 2,500
square fee located at 1024 Mistletoe Lane, Redding, California 96002. The Company subleases the
space expiring on July 1, 2009.
The Companys Sutter division is located in a free standing building with approximately 4,904
square feet located at 950 Tharp Road, Suite 800, Yuba City, California 95993. The Company leases
the space from Mr. David Lanza expiring on November 1, 2010 with the option to purchase.
Item 3. LEGAL PROCEEDINGS
The Company is subject to various pending and threatened legal actions arising in the ordinary
course of business. The Company maintains reserves for losses from legal actions that are both
probable and estimable. In the opinion of management the disposition of claims currently pending
will not have a material effect on the Companys consolidated financial position or results of
operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the quarter ended December 31, 2005 to a vote of the
Companys security holders.
18
PART II
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The principal market on which the Common Stock is traded is the NASDAQ National Market. The
Common stock is listed under the trading symbol BOCH. The following table sets forth the high and
low closing sales prices of the Common Stock on the NASDAQ National Market for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Price Per Share |
|
|
Quarter Ended: |
|
High |
|
Low |
|
Volume |
March 31, 2005 |
|
$ |
12.35 |
|
|
$ |
9.00 |
|
|
|
107,051 |
|
June 30, 2005 |
|
$ |
13.07 |
|
|
$ |
9.35 |
|
|
|
95,929 |
|
September 30, 2005 |
|
$ |
12.00 |
|
|
$ |
9.58 |
|
|
|
156,528 |
|
December 31, 2005 |
|
$ |
10.90 |
|
|
$ |
10.10 |
|
|
|
95,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2004 |
|
$ |
9.97 |
|
|
$ |
8.12 |
|
|
|
165,741 |
|
June 30, 2004 |
|
$ |
11.63 |
|
|
$ |
9.42 |
|
|
|
63,972 |
|
September 30, 2004 |
|
$ |
17.31 |
|
|
$ |
11.25 |
|
|
|
339,007 |
|
December 31, 2004 |
|
$ |
13.06 |
|
|
$ |
10.51 |
|
|
|
108,119 |
|
We believe there were approximately 676 stockholders of the Companys common stock as of December
31, 2005, including those held in street name, and the market price on that date was $10.10 per
share. As of December 31, 2005 there were 270 registered stockholders.
During 2005, the Board of Directors approved a quarterly cash dividend program. Cash dividends of
$0.06, $0.06 and $0.06 per share was paid on April 8, 2005, July 8, 2005 and October 7, 2005,
respectively, to stockholders of record as of March 31, 2005, June 30, 2005 and September 30, 2005,
respectively. On October 22, 2004 and 2003, a cash dividend of $0.23 and $0.22, respectively, per
share was paid to stockholders of record as of October 01, 2004 and 2003 respectively. The Company
currently expects to pay cash dividends at this rate in the future, but the Companys ability to
pay dividends is subject to certain regulatory requirements. The Federal Reserve Board (FRB)
generally prohibits a financial holding company from declaring or paying a cash dividend which
would impose undue pressure on the capital of subsidiary banks or would be funded only through
borrowing or other arrangements that might adversely affect a financial services holding companys
financial position. The FRBs policy is that a financial holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is sufficient to fully
fund each dividend and its prospective rate of earnings retention appears consistent with its
capital needs, asset quality and overall financial condition. The power of the board of directors
of an insured depository institution to declare a cash dividend or other distribution with respect
to capital is subject to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash needs of the
institution, as well as general business conditions.
In addition to the restrictions imposed under federal law, banks chartered under California law
generally may only pay cash dividends to the extent such payments do not exceed the lesser of
retained earnings of the bank or the banks net income for its last three fiscal years (less any
distributions to stockholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the
Commissioner of Financial Institutions in an amount not exceeding the greatest of the banks
retained earnings, the banks net income for its last fiscal year, or the banks net income for its
current fiscal year.
One of the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 signed by
President George W. Bush, included changes in how dividends are taxed. Investors will now pay lower
tax rates on dividends received from domestic corporations and qualified foreign corporations. In
the past, dividend income was another source of ordinary income, taxed at the investors normal tax
rate. Beginning in 2003, the maximum tax rate on qualifying dividends has dropped to 5%, 10% or 15%
depending on the investors tax bracket. The lower tax rate is scheduled to expire in 2008.
19
Equity Compensation Plan Information
The following chart sets forth information for the fiscal year ended December 31, 2005,
regarding equity based compensation plans of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
Number of securities to be |
|
|
Weighted average exercise |
|
|
future issuance under |
|
|
|
issued upon exercise of |
|
|
price of outstanding |
|
|
equity compensation plans |
|
|
|
outstanding options, |
|
|
options, warrants |
|
|
(excluding securities |
|
|
|
warrants and rights |
|
|
and rights |
|
|
reflected in column (a)). |
|
Plan category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
security holders |
|
|
608,316 |
|
|
$ |
5.20 |
|
|
|
124,740 |
|
Equity compensation
plans not approved
by security holders |
|
None |
|
|
None |
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
608,316 |
|
|
$ |
5.20 |
|
|
|
124,740 |
|
|
|
|
|
|
|
|
|
|
|
During 2005, the Company did not conduct any unregistered offerings or sales of its securities, nor
did it repurchase any of its outstanding securities.
20
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the five years ended December 31,
2005, have been derived from the Companys audited consolidated financial statements and should be
read in conjunction with Managements Discussion and Analysis of Financial Condition and Results
of Operations and the Companys audited consolidated financial statements and notes thereto,
included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Thousands (Except Ratios and Per Share Data) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
Statements of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income |
|
$ |
27,864 |
|
|
$ |
20,996 |
|
|
$ |
19,279 |
|
|
$ |
18,565 |
|
|
$ |
20,216 |
|
Net Interest Income |
|
$ |
20,238 |
|
|
$ |
16,887 |
|
|
$ |
14,694 |
|
|
$ |
12,517 |
|
|
$ |
11,190 |
|
Provision for Loan Losses |
|
$ |
448 |
|
|
$ |
554 |
|
|
$ |
515 |
|
|
$ |
620 |
|
|
$ |
255 |
|
Total Noninterest Income |
|
$ |
2,124 |
|
|
$ |
2,196 |
|
|
$ |
2,150 |
|
|
$ |
2,091 |
|
|
$ |
2,823 |
|
Total Noninterest Expense |
|
$ |
11,748 |
|
|
$ |
10,620 |
|
|
$ |
9,660 |
|
|
$ |
8,267 |
|
|
$ |
7,143 |
|
Total Revenues |
|
$ |
29,988 |
|
|
$ |
23,192 |
|
|
$ |
21,429 |
|
|
$ |
20,656 |
|
|
$ |
23,039 |
|
Net Income |
|
$ |
6,278 |
|
|
$ |
4,978 |
|
|
$ |
4,183 |
|
|
$ |
3,696 |
|
|
$ |
4,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
511,644 |
|
|
$ |
438,545 |
|
|
$ |
401,158 |
|
|
$ |
367,434 |
|
|
$ |
318,686 |
|
Total Net Loans |
|
$ |
363,305 |
|
|
$ |
318,801 |
|
|
$ |
278,204 |
|
|
$ |
280,351 |
|
|
$ |
216,960 |
|
Allowance for Loan Losses |
|
$ |
4,316 |
|
|
$ |
3,866 |
|
|
$ |
3,675 |
|
|
$ |
3,529 |
|
|
$ |
2,916 |
|
Total Deposits |
|
$ |
372,116 |
|
|
$ |
352,878 |
|
|
$ |
327,539 |
|
|
$ |
314,447 |
|
|
$ |
281,436 |
|
Stockholders Equity |
|
$ |
39,138 |
|
|
$ |
35,283 |
|
|
$ |
30,511 |
|
|
$ |
27,667 |
|
|
$ |
27,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets 2 |
|
|
1.34 |
% |
|
|
1.22 |
% |
|
|
1.10 |
% |
|
|
1.09 |
% |
|
|
1.49 |
% |
Return on Average Stockholders Equity 3 |
|
|
18.35 |
% |
|
|
18.18 |
% |
|
|
15.20 |
% |
|
|
13.92 |
% |
|
|
15.43 |
% |
Dividend Payout |
|
|
35.74 |
% |
|
|
39.29 |
% |
|
|
42.09 |
% |
|
|
46.57 |
% |
|
|
41.94 |
% |
Average Equity to Average Assets |
|
|
9.43 |
% |
|
|
7.91 |
% |
|
|
7.21 |
% |
|
|
7.83 |
% |
|
|
9.67 |
% |
Tier 1 Risk-Based Capital-Bank 4 |
|
|
12.08 |
% |
|
|
10.80 |
% |
|
|
10.77 |
% |
|
|
9.14 |
% |
|
|
10.93 |
% |
Total Risk-Based Capital-Bank |
|
|
13.11 |
% |
|
|
11.88 |
% |
|
|
12.02 |
% |
|
|
10.19 |
% |
|
|
12.18 |
% |
Net Interest Margin 5 |
|
|
4.59 |
% |
|
|
4.45 |
% |
|
|
4.22 |
% |
|
|
4.06 |
% |
|
|
4.24 |
% |
Average Earning Assets to Total Average Assets |
|
|
94.04 |
% |
|
|
92.62 |
% |
|
|
91.26 |
% |
|
|
90.90 |
% |
|
|
92.15 |
% |
Nonperforming Assets to Total Assets 6 |
|
|
0.08 |
% |
|
|
0.54 |
% |
|
|
1.16 |
% |
|
|
.10 |
% |
|
|
.11 |
% |
Net Charge-offs to Average Loans |
|
|
.00 |
% |
|
|
.12 |
% |
|
|
.13 |
% |
|
|
.01 |
% |
|
|
.02 |
% |
Allowance for Loan Losses to Total Loans |
|
|
1.17 |
% |
|
|
1.20 |
% |
|
|
1.30 |
% |
|
|
1.26 |
% |
|
|
1.35 |
% |
Nonperforming Loans to Allowance for Loan Losses |
|
|
9.15 |
% |
|
|
61.64 |
% |
|
|
126.34 |
% |
|
|
0.20 |
% |
|
|
11.97 |
% |
Efficiency Ratio 7 |
|
|
52.54 |
% |
|
|
55.65 |
% |
|
|
59.15 |
% |
|
|
56.59 |
% |
|
|
50.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding basic |
|
|
8,600 |
|
|
|
8,283 |
|
|
|
8,033 |
|
|
|
8,013 |
|
|
|
8,109 |
|
Average Common Shares Outstanding diluted |
|
|
8,845 |
|
|
|
8,703 |
|
|
|
8,327 |
|
|
|
8,604 |
|
|
|
8,568 |
|
Book Value Per Common Share |
|
$ |
4.52 |
|
|
$ |
4.27 |
|
|
$ |
3.80 |
|
|
$ |
3.45 |
|
|
$ |
3.36 |
|
Basic Earnings Per Common Share |
|
$ |
0.73 |
|
|
$ |
0.60 |
|
|
$ |
0.52 |
|
|
$ |
0.46 |
|
|
$ |
0.51 |
|
Diluted Earnings Per Common Share |
|
$ |
0.71 |
|
|
$ |
0.57 |
|
|
$ |
0.50 |
|
|
$ |
0.43 |
|
|
$ |
0.48 |
|
Cash Dividends Per Common Share 8 |
|
$ |
0.26 |
|
|
$ |
0.23 |
|
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
|
|
1 |
|
Regulatory Capital Ratios and Asset Quality
Ratios are end of period ratios. With the exception of end of period ratios,
all ratios are based on average daily balances during the indicated period. |
|
2 |
|
Return on average assets is net income divided
by average total assets. |
|
3 |
|
Return on average equity is net income divided
by average stockholders equity. |
|
4 |
|
Regulatory capital ratios are defined in
detail in the table on pages 37-38. |
|
5 |
|
Net interest margin equals net interest income
as a percent of average interest-earning assets. |
|
6 |
|
Non-performing assets includes all
nonperforming loans (nonaccrual loans, loans 90 days past due and still
accruing interest and restructured loans) and real estate acquired by
foreclosure. |
|
7 |
|
The efficiency ratio is calculated by dividing
non-interest expense by the sum of net interest income and noninterest income.
The efficiency ratio measures how the Company spends in order to generate each
dollar of net revenue. |
|
8 |
|
Cash dividends declared during the current
fiscal year |
21
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the Consolidated Financial
Statements of the Company and related notes thereto appearing elsewhere in this report. This report
includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the
Exchange Act) and the Private Securities Litigation Reform Act of 1995. These statements are not
guarantees of future performance and involve certain risks. These statements are based on
managements beliefs and assumptions, and on information available to management as of the date of
this document. Forward-looking statements include the information concerning possible or assumed
future results of operations of the Company set forth under the heading Managements Discussion
and Analysis of Financial Condition and Results of Operations. Forward-looking statements also
include statements in which words such as expects, anticipates, intend, plan, believes,
estimate, consider or similar expressions or conditional verbs such as will, should,
would and could are intended to identify such forward looking statements. The Companys actual
future results and stockholder values may differ materially from those anticipated and expressed in
these forward-looking statements. Many of the factors that will determine these results and
values, including those discussed under the heading Risk Factors That May Affect Results, are
beyond the Companys ability to control or predict. Investors are cautioned not to put undue
reliance on any forward-looking statements. In addition, the Company does not have any intention
to and assumes no obligation to update forward-looking statements after the date of the filing of
this report, even if new information, future events or other circumstances have made such
statements incorrect or misleading. Except as specifically noted herein all referenced to the
Company refer to Bank of Commerce Holdings, a California corporation, and its consolidated
subsidiaries.
Executive Overview
Our Company was established to make a profitable return while serving the financial needs of the
business and professional communities of our markets. We are in the financial services business,
and no line of financial services is beyond our charter as long as it serves the needs of
businesses and professionals in our communities. The mission of our Company is to provide its
stockholders with a safe and profitable return on their investment over the long term. Management
will attempt to minimize risk to our stockholders by making prudent business decisions, maintaining
adequate levels of capital and reserves, and maintaining effective communications with
stockholders.
Our Companys most valuable asset is its customers. We will consider their needs first when we
design our products. High-quality customer service is an important mission of our Company, and how
well we accomplish this mission will have a direct influence on our profitability. For the past two
years we have followed a disciplined organic growth strategy, pursuing growth by attracting more
customers and expanding our relationships with our existing customer base.
Our vision is to embrace changes in the industry and develop profitable business strategies that
allow us to maintain our customer relationships and build new ones. Our competitors are no longer
just banks. We must compete with financial powerhouses that want our core business. The flexibility
provided by the Financial Holding Company Act will become increasingly important. We have
developed strategic plans that evaluate additional financial services and products that can be
delivered to our customers efficiently and profitably. Producing quality returns is, as always, a
top priority.
The Companys long term success rests on the shoulders of the leadership team to effectively
enhance the performance of the Company. As a financial services company, we are in the business of
taking risk. Whether we are successful depends largely upon whether we take the right risks and get
paid appropriately for the risks we take. Our governance structure enables us to manage all major
aspects of the Companys business effectively through an integrated process that includes
financial, strategic, risk and leadership planning.
We define risks to include not only credit, market and liquidity risk the traditional concerns
for financial institutions but also operational risks, including risks related to systems,
processes or external events, as well as legal, regulatory and reputation risks. Our management
processes, structures, and policies help to ensure compliance with laws and regulations and provide
clear lines for decision-making and accountability. Results are important, but equally important is
how we achieve those results. Our core values and commitment to high ethical standards is material
to sustaining public trust and confidence in our Company.
22
Risk Management
Overview
Through our corporate governance structure, risk and return is evaluated to produce sustainable
revenues, reduce risks of earning volatility and increase stockholder value. The financial services
industry is exposed to four major risks; liquidity, credit, market and operational. Liquidity risk
is the inability to meet liability maturities and withdrawals, fund asset growth and otherwise meet
contractual obligations at reasonable market rates. Credit risk is the inability of a customer to
meet its repayment obligations. Market risk is the fluctuation in asset and liability values caused
by changes in market prices and yields and Operational risk is the potential for losses resulting
from events involving people, processes, technology, legal issues, external events, regulatory or
reputation.
Board Committees
Our corporate governance structure begins with our Board of Directors. The Board of Directors
evaluates risk through the Chief Executive Officer (CEO) and four Board Committees:
|
|
Loan Committee reviews credit risks and the adequacy of the allowance for loan losses. |
|
|
|
Asset/Liability Management Committee (ALCO) reviews liquidity and market risks. |
|
|
|
Audit Committee reviews the scope and coverage of internal and external audit activities. |
|
|
|
Nominating and Corporate Governance Committee evaluates corporate governance structure, charters, committee performance
and acts in best interests of the corporation and its stockholders with regard to the appointment of director nominees. |
These committees review reports from management, the Companys auditors, and other outside sources.
On the basis of materials that are available to them and on which they rely, they review the
performance of the Companys management and personnel, and establish policies, but neither the
committees nor their individual members (in their capacities as members of the Board of Directors)
are responsible for daily operations of the Company. In particular, risk management activities
relating to individual loans are undertaken by Company personnel in accordance with the policies
established by the Board committees.
Senior Leadership Committees
To ensure that our risk management goals and objectives are accomplished oversight of our risk
taking and risk management activities are conducted through five Senior Leadership committees.
|
|
The Senior Leadership Committee establishes short and long-term
strategies and operating plans. The committee establishes
performance measures and reviews performance to plan on a monthly
basis. |
|
|
|
The Credit Round Table Committee recommends corporate credit
practices and limits, including industry concentration limits and
approval requirements and exceptions. |
|
|
|
The Technology Steering Committee establishes technological
strategies, makes technology investment decisions, and manages the
implementation process. |
|
|
|
The ALCO Round Table Committee establishes and monitors liquidity
ranges, pricing, maturities, investment goals, and interest spread
on balance sheet accounts. |
|
|
|
The SOX 404 Compliance Team has established the master plan for
full documentation of the Companies internal controls and
compliance with the Sarbanes-Oxley Act, Section 404. |
Risk Management Controls
We use various controls to manage risk exposure within the Company. Budgeting and planning
processes provide for early indication of unplanned results or risk levels. Models are used to
estimate market risk and net interest income sensitivity. Segmentation analysis is used to estimate
expected and unexpected credit losses. Compliance to regulatory guidelines plays a significant role
in risk management as well as corporate culture and the actions of management. Our code of ethics
provides the guidelines for all employees to conduct themselves with the highest integrity in the
delivery of service to our clients.
23
Liquidity Risk Management
Liquidity Risk
Liquidity risk is the inability to meet liability maturities and withdrawals, fund asset growth and
otherwise meet contractual obligations at reasonable market rates. Liquidity management involves
maintaining ample and diverse funding capacity, liquid assets and other sources of cash to
accommodate fluctuations in asset and liability levels due to business shocks or unanticipated
events. ALCO is responsible for establishing our liquidity policy and the accounting department is
responsible for planning and executing the funding activities and strategies.
Asset liquidity sources consist of the repayments and maturities of loans, selling of loans,
short-term money market investments, maturities and sales of securities from the available-for-sale
security portfolio. Increased available-for-sale security balances were responsible for the major
use of liquidity, followed by growth in the loan portfolio. The weighted-average life of the
available-for-sale security portfolio is 3.51 years.
Liquidity is generated from liabilities through deposit growth and short-term borrowings. We
emphasize preserving and maximizing customer deposits and other customer-based funding sources.
Deposit marketing strategies are reviewed for consistency with liquidity policy objectives.
Internal deposit growth provided approximately $19,238,000 and borrowings provided approximately
$40,882,000 of liquidity.
The Company also had available correspondent banking lines of credit through correspondent
relationships totaling approximately $20,000,000 and available secured borrowing lines of
approximately $62,018,000 with the Federal Home Loan Bank of San Francisco. While these sources are
expected to continue to provide significant amounts of liquidity in the future, their mix, as well
as the possible use of other sources, will depend on future economic and market conditions.
Liquidity is also provided or used through the results of the Companys operations.
The Companys liquid assets (cash and due from banks, federal funds sold and available-for-sale
securities) totaled $120.6 million or 23.6% of total assets at December 31, 2005, $101.7 million or
23.2% of total assets at December 31, 2004 and $102.2 million or 25.5% of total assets at December
31, 2003. In 2005, the Holding Companys primary source of funding was exercises of stock options
and Trust Preferred financing. The Holding Company expects to receive dividends from the Bank in
2006. (See note 18 to the Consolidated Financial Statements for a discussion of the restrictions on
the Banks ability to pay dividends.)
To accommodate future growth and business needs, the Company develops an annual capital expenditure
budget during strategic planning sessions. Gross capital expenditures for 2005 were approximately
$235,000 for replacement of furniture and equipment, technological enhancements and in progress
purchases. The Company expects that the earnings of the Company, acquisition of core deposits and
wholesale borrowing arrangements are sufficient to support liquidity needs in 2006.
Short term borrowings
The Company actively uses Federal Home Loan Bank (FHLB) advances as a source of wholesale
funding to provide liquidity. At December 31, 2005, the Companys FHLB long-term advances were
variable rate tied to prime index minus a spread, fixed term borrowings without call or put option
features. At December 31, 2005 the Companys FHLB short-term advance was a fixed rate, fixed term
borrowing without call or put features. At December 2005, the Company had $55 million in FHLB
advances outstanding compared to $35 million at December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Securities sold under agreements to repurchase with weighted average interest rates of
3.19%, 0.15% and 0.20% at December 31, 2005, 2004
and 2003, respectively |
|
$ |
22,885,658 |
|
|
$ |
2,003,712 |
|
|
$ |
3,748,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank borrowings with weighted average interest rates of 4.17%, 2.56%
and 1.16% at December 31, 2005, 2004 and 2003, respectively |
|
|
55,000,000 |
|
|
|
35,000,000 |
|
|
|
30,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short term borrowings |
|
$ |
77,885,658 |
|
|
$ |
37,003,712 |
|
|
$ |
33,748,797 |
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Securities sold under agreements to repurchase: |
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding at any month end |
|
$ |
24,308,869 |
|
|
$ |
10,238,525 |
|
|
$ |
5,497,582 |
|
Average balance during the year |
|
|
17,812,885 |
|
|
|
2,164,067 |
|
|
|
3,899,800 |
|
Weighted average interest rate during year |
|
|
2.42 |
% |
|
|
2.44 |
% |
|
|
2.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding at any month end |
|
$ |
55,000,000 |
|
|
$ |
35,000,000 |
|
|
$ |
30,000,000 |
|
Average Balance during the year |
|
|
34,032,738 |
|
|
|
28,715,847 |
|
|
|
14,820,597 |
|
Weighted average interest rate during year |
|
|
3.37 |
% |
|
|
1.53 |
% |
|
|
1.49 |
% |
|
Credit Risk Management
Credit risk arises from the inability of a customer to meet its repayment obligations. Credit risk
exists in our outstanding loans, letters of credit and unfunded loan commitments. We manage credit
risk based on the risk profile of the borrower, repayment sources and the nature of underlying
collateral given current events and conditions.
Commercial portfolio credit risk management
Commercial credit risk management begins with an assessment of the credit risk profile of the
individual borrower based on an analysis of the borrowers financial position in light of current
industry, economic or geopolitical trends. As part of the overall credit risk assessment of a
borrower, each commercial credit is assigned a risk grade and is subject to approval based on
existing credit approval standards. Risk grading is a factor in determining the adequacy of the
allowance for loan and lease losses. Credit decisions are determined by Credit Administration to
certain limitations and approvals from the Loan Committee above certain limitations. Credit risk
is continuously monitored by Credit Administration for possible adjustment if there has been a
change in the borrowers ability to perform under its obligations. Additionally, we manage the size
of our credit exposure through loan sales and loan participation agreements.
The primary sources of repayment of the commercial loans of the Company are operating cash
flows and the borrowers conversion of short-term assets to cash. The net assets of the borrower or
guarantor are usually identified as a secondary source of repayment. The principal factors
affecting the Banks risk of loss from commercial lending include each borrowers ability to manage
its business affairs and cash flows, local and general economic conditions and real estate values
in the Companys service area. The Company manages its commercial loan portfolio by monitoring its
borrowers payment performance and their respective financial condition and makes periodic
adjustments, if necessary, to the risk grade assigned to each loan in the portfolio. The Companys
evaluations of its borrowers are facilitated by managements knowledge of local market conditions
and periodic reviews by a consultant of the credit administration policies of the Company.
Real estate portfolio credit risk management
The principal source of repayment of the real estate construction loans of the Company is the sale
of the underlying collateral or the availability of permanent financing from the Company or other
lending source. The principal risks associated with real estate construction lending include
project cost overruns that absorb the borrowers equity in the project and deterioration of real
estate values as a result of various factors, including competitive pressures and economic
downturns.
The Company manages its credit risk associated with real estate construction lending by
establishing a loan-to-value ratio on projects on an as-completed basis, inspecting project status
in advance of disbursements, and matching maturities with expected completion dates. Generally, the
Company requires a loan-to-value ratio of not more than 80% on single family residential
construction loans.
The specific underwriting standards of the Company and methods for each of its principal lines of
lending include industry-accepted analysis and modeling and certain proprietary techniques. The
underwriting criteria of the Bank are designed to comply with applicable regulatory guidelines,
including required loan-to-value ratios. The credit administration policies of the Company contain
mandatory lien position and debt service coverage requirements, and the Bank generally requires a
guarantee from 20% or more of the owners of the borrowing entity.
25
Concentrations of credit risk
Portfolio credit risk is evaluated with the goal that concentrations of credit exposure do not
result in unacceptable levels of risk. Concentrations of credit exposure can be measured in various
ways including industry, product, geography, and customer relationship. We review non-real estate
commercial loans by industry and real estate loans by geographic location and property type.
Nonperforming assets
The Companys practice is to place an asset on nonaccrual status when one of the following
events occurs:(i) Any installment of principal or interest is 90 days or more past due (unless in
managements opinion the loan is well-secured and in the process of collection), (ii) management
determines the ultimate collection of principal or interest to be unlikely or (iii) the terms of
the loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans may be on nonaccrual, are 90 days past due and still accruing, or have been
restructured.
Allowance for loan and lease losses (ALLL)
The allowance for loan and lease losses represents managements best estimate of probable losses in
the loans and leases portfolio. Within the allowance, reserves are allocated to segments of the
portfolio based on specific formula components. Changes to the allowance for credit losses are
reported in the Consolidated Statement of Income in the provision for loan losses.
We perform periodic and systematic detailed evaluations of our lending portfolio to identify and
estimate the inherent risks and assess the overall collectibility. These evaluations include
general conditions such as the portfolio composition, size and maturities of various segmented
portions of the portfolio such as secured, unsecured, construction, and Small Business
Administration (SBA). Additional factors include concentrations of borrowers, industries,
geographical sectors, loan product, loan classes and collateral types, volume and trends of loan
delinquencies and non-accrual; criticized and classified assets and trends in the aggregate in
significant credits identified as watch list items.
The Companys allowance for loan and lease losses is the accumulation of various components that
are calculated based upon independent methodologies. All components of the allowance for loan
losses represent an estimation performed pursuant to Statement of Financial Accounting Standards
(SFAS) Statement No. 5, Accounting for Contingencies or SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. Managements estimate of each SFAS No. 5 component is based on certain
observable data that management believes is the most reflective of the underlying credit losses
being estimated. Changes in the amount of each component of the allowance for loan losses are
directionally consistent with changes in the observable data, taking into account the interaction
of the SFAS No. 5 components over time.
An essential element of the methodology for determining the allowance for loan and lease losses is
the Companys credit risk evaluation process, which includes credit risk grading individual,
commercial, construction, commercial real estate, and consumer loans. Loans are assigned credit
risk grades based on the Companys assessment of conditions that affect the borrowers ability to
meet its contractual obligations under the loan agreement. That process includes reviewing
borrowers current financial information, historical payment experience, credit documentation,
public information, and other information specific to each individual borrower. Loans are reviewed
on an annual or rotational basis or as management become aware of information affecting the
borrowers ability to fulfill its obligations. Credit risk grades carry a dollar weighted risk
percentage.
For individually impaired loans, SFAS No. 114 provides guidance on the acceptable methods to
measure impairment. Specifically, SFAS No. 114 states that when a loan is impaired, we measure
impairment based on the present value of expected future principal and interest cash flows
discounted at the loans effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loans observable market price or the fair value of collateral,
if the loan is collateral dependent. When developing the estimate of future cash flows for a loan,
we consider all available information reflecting past events and current conditions, including the
effect of existing environmental factors. In addition to the ALLL, an allowance for unfunded loan
commitments and letters of credit is determined using estimates of the probability of funding. This
reserve is carried as a liability on the consolidated balance sheet.
26
We make provisions to the ALLL on a regular basis through charges to operations that are reflected
in our consolidated statements of income as provision expense for loan losses. When a loan is
deemed uncollectible, it is charged against the allowance. Any recoveries of previously charged-off
loans are credited back to the allowance. There is no precise method of predicting specific losses
or amounts that ultimately may be charged-off on particular categories of the loan portfolio.
Various regulatory agencies, as an integral part of their examination process, periodically review
the Companys ALLL. Such agencies may require the Company to provide additions to the allowance
based on their judgement of information available to them at the time of their examination. There
is uncertainty concerning future economic trends. Accordingly, it is not possible to predict the
effect future economic trends may have on the level of the provisions for possible loan losses in
future periods. The ALLL should not be interpreted as an indication that charge-offs in future
periods will occur in the stated amounts or proportions.
The following table summarizes the activity in the ALLL reserves for the periods indicated.
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
Beginning Balance: |
|
$ |
3,866 |
|
|
$ |
3,675 |
|
|
$ |
3,529 |
|
|
$ |
2,916 |
|
|
$ |
2,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
448 |
|
|
|
554 |
|
|
|
515 |
|
|
|
620 |
|
|
|
255 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Financial |
|
|
(83 |
) |
|
|
(367 |
) |
|
|
(379 |
) |
|
|
(8 |
) |
|
|
(191 |
) |
Real Estate |
|
|
(0 |
) |
|
|
(0 |
) |
|
|
(0 |
) |
|
|
(18 |
) |
|
|
(345 |
) |
Other |
|
|
(10 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(0 |
) |
|
|
(0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charge-offs |
|
|
(93 |
) |
|
|
(368 |
) |
|
|
(380 |
) |
|
|
(26 |
) |
|
|
(536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Financial |
|
|
93 |
|
|
|
2 |
|
|
|
11 |
|
|
|
19 |
|
|
|
35 |
|
Real Estate |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
452 |
|
Other |
|
|
2 |
|
|
|
3 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recoveries |
|
|
95 |
|
|
|
5 |
|
|
|
11 |
|
|
|
19 |
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs |
|
|
2 |
|
|
|
(363 |
) |
|
|
(369 |
) |
|
|
(7 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
4,316 |
|
|
$ |
3,866 |
|
|
$ |
3,675 |
|
|
$ |
3,529 |
|
|
$ |
2,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to
total loans |
|
|
1.17 |
% |
|
|
1.20 |
% |
|
|
1.30 |
% |
|
|
1.26 |
% |
|
|
1.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs to average loans |
|
|
.00 |
% |
|
|
.12 |
% |
|
|
.13 |
% |
|
|
.01 |
% |
|
|
.02 |
% |
|
The provisions for loan and lease losses decreased to $448,000 for 2005 versus $554,000 in 2004.
Net recoveries were approximately $2,000 compared to charge-offs of approximately $363,000 in 2004.
Actual and future results of the allowance provisions and charge-offs may differ materially from
trends expressed in the table and are beyond the Companys ability to predict.
Allocation of Allowance for Loan and Lease Losses by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, 2005 |
|
|
Dec. 31, 2004 |
|
|
Dec. 31, 2003 |
|
|
Dec. 31, 2002 |
|
|
Dec. 30, 2001 |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
of |
|
|
|
|
|
|
of |
|
|
|
|
|
|
of |
|
|
|
|
|
|
of |
|
|
|
|
|
|
of |
|
|
|
|
|
|
|
category |
|
|
|
|
|
|
category |
|
|
|
|
|
|
category |
|
|
|
|
|
|
category |
|
|
|
|
|
|
category |
|
|
|
|
|
|
|
to total |
|
|
|
|
|
|
to total |
|
|
|
|
|
|
to total |
|
|
|
|
|
|
to total |
|
|
|
|
|
|
to total |
|
(Dollars in thousands) |
|
Amount |
|
|
loans |
|
|
Amount |
|
|
loans |
|
|
Amount |
|
|
loans |
|
|
Amount |
|
|
loans |
|
|
Amount |
|
|
loans |
|
Balance at end of
period applicable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Financial |
|
$ |
1,900 |
|
|
|
30.76 |
% |
|
$ |
2,087 |
|
|
|
32.64 |
% |
|
$ |
2,315 |
|
|
|
37.01 |
% |
|
$ |
2,047 |
|
|
|
34.84 |
% |
|
$ |
1,691 |
|
|
|
34.96 |
% |
Commercial Real Estate |
|
$ |
1,375 |
|
|
|
41.11 |
% |
|
$ |
1,149 |
|
|
|
41.83 |
% |
|
$ |
878 |
|
|
|
36.46 |
% |
|
$ |
952 |
|
|
|
43.67 |
% |
|
$ |
787 |
|
|
|
37.68 |
% |
Construction and
Development |
|
$ |
936 |
|
|
|
27.57 |
% |
|
$ |
588 |
|
|
|
23.95 |
% |
|
$ |
456 |
|
|
|
23.64 |
% |
|
$ |
494 |
|
|
|
14.29 |
% |
|
$ |
408 |
|
|
|
20.60 |
% |
Consumer Loans |
|
$ |
28 |
|
|
|
0.53 |
% |
|
$ |
23 |
|
|
|
0.21 |
% |
|
$ |
20 |
|
|
|
0.16 |
% |
|
$ |
20 |
|
|
|
0.25 |
% |
|
$ |
16 |
|
|
|
0.20 |
% |
Other Loans |
|
$ |
0 |
|
|
|
0.00 |
% |
|
$ |
0 |
|
|
|
0.00 |
% |
|
$ |
0 |
|
|
|
0.22 |
% |
|
$ |
0 |
|
|
|
0.23 |
% |
|
$ |
0 |
|
|
|
0.33 |
% |
Unallocated |
|
$ |
77 |
|
|
|
0.03 |
% |
|
$ |
19 |
|
|
|
1.37 |
% |
|
$ |
6 |
|
|
|
2.51 |
% |
|
$ |
16 |
|
|
|
6.72 |
% |
|
$ |
14 |
|
|
|
6.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for
loan and lease losses |
|
$ |
4,316 |
|
|
|
100.00 |
% |
|
$ |
3,866 |
|
|
|
100.00 |
% |
|
$ |
3,675 |
|
|
|
100.00 |
% |
|
$ |
3,529 |
|
|
|
100.00 |
% |
|
$ |
2,916 |
|
|
|
100.00 |
% |
27
Market Risk Management
Market risk is the potential loss due to adverse changes in market prices and yields. Market risk
is inherent in the Companys operating positions and activities including customers loans, deposit
accounts, securities and long-term debt. Loans and deposits generate income and expense,
respectively, and the value of cash flows change based on general economic levels, most
importantly, the level of interest rates.
The goal for managing the assets and liabilities of the Company is to maximize stockholder value
and earnings while maintaining a high quality balance sheet without exposing the Company to undue
interest rate risk. The absolute level and volatility of interest rates can have a significant
impact on the Companys profitability. Market risk arises from exposure to changes in interest
rates, exchange rates, commodity prices, and other relevant market rate or price risk. The Company
does not operate a trading account, does not hold any financial derivatives and does not hold a
position with exposure to foreign currency exchange. The Company faces market risk through interest
rate volatility. Net interest income risk is measured based on rate shocks over different time
horizons versus a current stable interest rate environment. Assumptions used in these calculations
are similar to those used in the planning and budgeting model. The overall interest rate risk
position and strategies are reviewed on an ongoing basis with ALCO.
Securities Portfolio
The securities portfolio is central to our asset liability management strategies. The decision to
purchase or sell securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment, liquidity and regulatory requirements. The
Company classifies its securities as available-for-sale or held-to-maturity at the time of
purchase. Generally, all securities are purchased with the intent and ability to hold the security
for long-term investment, and the Company has both the ability and intent to hold
held-to-maturity investments to maturity. The Company does not engage in trading activities.
Securities held-to-maturity are carried at cost adjusted for the accretion of discounts and
amortization of premiums. Securities available-for-sale may be sold to implement the Companys
asset liability management strategies and in response to changes in interest rates, prepayment
rates and similar factors. Securities available-for-sale are recorded at market value and
unrealized gains or losses, net of income taxes, are reported as a component of accumulated other
comprehensive income(loss), in a separate component of stockholders equity. Gain or loss on sale
of securities is based on the specific identification method. Securities held-to-maturity at
December 31, 2005, 2004 and 2003 consisted of municipal and mortgage-backed securities with an
amortized cost of $6,932,652, $448,753 million and $1.4 million, respectively. At December 31,
2005, $760,427 had a contractual maturity of over ten years and a weighted-average yield of 7.35%.
Operational Risk Management
Operational risk is the potential for loss resulting from events involving people, processes,
technology, legal or regulatory issues, external events, and reputation. In keeping with the
corporate governance structure, the Senior Leadership committee is responsible for operational risk
controls. Operational risks are managed through specific policies and procedures, controls and
monitoring tools. Examples of these include reconciliation processes, transaction monitoring and
analysis and system audits. Operational risks fall into two major categories, business specific and
company wide. The Senior Leadership committee works to ensure consistency in policies, processes
and assessments. With respect to company wide risks, the Senior Leadership committee works directly
with Directors to develop policies and procedures for information security, business resumption
plans, compliance and legal issues.
Critical Accounting Policies
General
The Companys significant accounting principles are described in Note 2 of the consolidated
financial statements and are essential to understanding Managements Discussion and Analysis of
Results of Operations and Financial Condition. Bank of Commerce Holdings consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the financial effects of
transactions and events that have already occurred. Some of the Companys accounting principles
require significant judgement to estimate values of assets or liabilities. In addition, certain
accounting principles require significant judgment in applying the complex accounting principles to
transactions to determine the most appropriate treatment.
28
Allowance for Loan and Lease Losses (ALLL)
The allowance for loan and lease losses is managements best estimate of the probable losses that
may be sustained in our loan portfolio. The allowance is based on two basic principles of
accounting. (1) SFAS No.5 which requires that losses be accrued when they are probable of occurring
and estimable and (2) SFAS No. 114, which requires that losses be accrued based on the differences
between that value of collateral, present value of future cash flows or values that are observable
in the secondary market and the loan balance. The Company performs periodic and systematic detailed
evaluations of its lending portfolio to identify and estimate the inherent risks and assess the
overall collectibility. These evaluations include general conditions such as the portfolio
composition, size and maturities of various segmented portions of the portfolio such as secured,
unsecured, construction, and Small Business Administration (SBA).
Additional factors include concentrations of borrowers, industries, geographical sectors, loan
product, loan classes and collateral types; volume and trends of loan delinquencies and
non-accrual; criticized and classified assets and trends in the aggregate in significant credits
identified as watch list items. There are several components to the determination of the adequacy
of the ALLL. Each of these components is determined based upon estimates that can and do change
when the actual events occur. The Company estimates the SFAS No. 5 portion of the ALLL based on the
segmentation of its portfolio. For those segments that require an ALLL, the Company estimates loan
losses on a monthly basis based upon its ongoing loan review process and analysis of loan
performance. The Company follows a systematic and consistently applied approach to select the most
appropriate loss measurement methods and support its conclusions and rationale with written
documentation. One method of estimating loan losses for groups of loans is through the application
of loss rates to the groups aggregate loan balances. Such rates typically reflect historical loss
experience for each group of loans, adjusted for relevant economic factors over a defined period of
time. The Company evaluates and modifies its loss estimation model as needed to ensure that the
resulting loss estimate is consistent with GAAP. For individually impaired loans, SFAS No. 114
provides guidance on the acceptable methods to measure impairment. Specifically, SFAS No. 114
states that when a loan is impaired, the Company should measure impairment based on the present
value of expected future principal and interest cash flows discounted at the loans effective
interest rate, except that as a practical expedient, a creditor may measure impairment based on a
loans observable market price or the fair value of collateral, if the loan is collateral
dependent. When developing the estimate of future cash flows for a loan, the Company considers all
available information reflecting past events and current conditions, including the effect of
existing environmental factors.
Stock-Based Compensation
The Company uses the intrinsic value based method for measuring compensation cost related to stock
options. Under the intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at grant date over the amount an employee must pay to acquire the
stock. This cost is amortized on a straight-line basis over the vesting period of the options
granted. The Company applies Accounting Principles Board Opinion (APB) No. 25 Accounting for
Stock Issued to Employees and related interpretations in accounting for stock options. The fair
value of options granted is determined on the date of the grant using a binomial option-pricing
model with the following assumptions: a current volatility rate of 32.36%, a risk-fee interest rate
of 3.92% (based upon the five year treasury coupon rate at the time the options were issued),
expected dividends of $0.24 per share per year, an annual dividend rate of 2.49%, an assumed
forfeiture rate of zero and an expected life of seven years.
Revenue recognition
The Companys primary source of revenue is net interest income, which is the difference between the
interest income it receives on interest-earning assets and the interest expense it pays on
interest-bearing liabilities, and (ii) fee income, which includes fees earned on deposit services,
income from SBA lending, electronic-based cash management services, mortgage brokerage fee income
and merchant credit card processing services. Interest income is recorded on an accrual basis. Note
2 to the Consolidated Financial Statements offers an explanation of the process for determining
when the accrual of interest income is discontinued on an impaired loan.
Fixed Assets
Other estimates that the Company uses in its accounting include the expected useful lives of
depreciable assets, such as buildings, building improvements, equipment, and furniture. The useful
lives of various technological related hardware and software could be subject to change due to
advances in technology and the general adoption of new standards for
technology or interfaces among computer or telecommunication systems.
29
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using currently enacted tax rates applied to such taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. If future income should prove non-existent or less than the
amount of deferred tax assets within the tax years to which they may be applied, the asset may not
be realized and our net income will be reduced.
Financial Highlights Results of Operations
The following discussion and analysis provides a comparison of the results of operations for
2005 and 2004. This discussion should be read in conjunction with the consolidated financial
statements and related notes.
Key Financial Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
Profitability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
1.34 |
% |
|
|
1.22 |
% |
|
|
1.10 |
% |
|
|
1.09 |
% |
|
|
1.49 |
% |
Return on average equity |
|
|
18.35 |
% |
|
|
18.18 |
% |
|
|
15.20 |
% |
|
|
13.92 |
% |
|
|
15.43 |
% |
Average earning assets to total average assets |
|
|
94.04 |
% |
|
|
92.62 |
% |
|
|
91.26 |
% |
|
|
90.90 |
% |
|
|
92.15 |
% |
Interest Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
4.59 |
% |
|
|
4.45 |
% |
|
|
4.22 |
% |
|
|
4.06 |
% |
|
|
4.24 |
% |
Asset Quality |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans |
|
|
1.17 |
% |
|
|
1.20 |
% |
|
|
1.30 |
% |
|
|
1.26 |
% |
|
|
1.35 |
% |
Nonperforming assets to total assets |
|
|
0.08 |
% |
|
|
0.54 |
% |
|
|
1.16 |
% |
|
|
0.10 |
% |
|
|
0.11 |
% |
Net charge-offs to average loans |
|
|
0.00 |
% |
|
|
0.12 |
% |
|
|
0.13 |
% |
|
|
0.01 |
% |
|
|
0.02 |
% |
Liquidity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to deposits |
|
|
97.63 |
% |
|
|
90.34 |
% |
|
|
84.94 |
% |
|
|
89.16 |
% |
|
|
77.09 |
% |
Liquidity ratio |
|
|
23.57 |
% |
|
|
23.23 |
% |
|
|
25.49 |
% |
|
|
18.32 |
% |
|
|
25.69 |
% |
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital Bank |
|
|
12.08 |
% |
|
|
10.80 |
% |
|
|
10.77 |
% |
|
|
9.14 |
% |
|
|
10.93 |
% |
Total risk-based capital Bank |
|
|
13.11 |
% |
|
|
11.88 |
% |
|
|
12.02 |
% |
|
|
10.19 |
% |
|
|
12.18 |
% |
Efficiency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio |
|
|
52.54 |
% |
|
|
55.65 |
% |
|
|
59.15 |
% |
|
|
56.59 |
% |
|
|
50.97 |
% |
|
The above table represents key financial performance ratios that the Senior Leadership Team of the
Company monitor on a monthly basis in comparison with Uniform Bank Performance Report peer data.
Uniform Bank Performance Reports are available on all Federal Deposit Insurance Corporation insured
financial institutions and are used to measure quality performance to peer groupings and may be
obtained online at www.fdic.gov. Executive Management monitors the high-performing sector
of the peer group and uses this data to examine strategies of other high-performing financial
institutions and to establish the financial performance goals of the Company on an annual basis.
These goals are then communicated through budgets, strategies, planning and projections to the
Senior Leadership Team for implementation. Results are monitored both to plan and to peer at the
Board of Directors level on a monthly basis.
Sources of Income
The Company derives its income from two principal sources: (i) net interest income, which is
the difference between the interest income it receives on interest-earning assets and the interest
expense it pays on interest-bearing liabilities, and (ii) fee income, which includes fees earned on
deposit services, income from SBA lending, electronic-based cash management services, mortgage
brokerage fee income and merchant credit card processing services. The income of the Company
depends to a great extent on net interest income. These interest rate factors are highly sensitive
to many factors, which are beyond the Companys control, including general economic conditions,
inflation, recession, and the
policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board.
Because of the Companys predisposition to variable rate pricing and non-interest bearing demand
deposit accounts, the Company is considered asset sensitive. Consequently, the Company is adversely
affected by declining interest rates.
30
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
The Company reported net income of $6.28 million for the year ended December 31, 2005,
representing an increase of approximately $1.3 million or 26.1%, over net income of $4.98 million
for the year ended December 31, 2004. The primary factors contributing to the increase in net
income includes an increase of $3.4 million or 19.8% improvement in net interest income coupled
with loan growth of $44.5 million or 13.9% in volume. Increases in the net interest margin are
primarily attributed to increases in the volume of earning assets coupled with a rising interest
rate environment.
The Companys provision for loan losses decreased to $448,000 in 2005 from $554,000 in 2004. Growth
in the portfolio was the principal factor for current period provisions. Non performing assets as a
percentage of total assets decreased to 0.08% compared with 0.54% in 2004. This key ratio coupled
with a net charge-off ratio of zero for the year is representative of the quality inherent in the
loan portfolio.
Return on average assets (ROA) was 1.34% and return on average common equity (ROE) was 18.35% in
2005 compared with 1.22% and 18.18% respectively in 2004, directly related to the increase in net
income. Diluted earnings per share for 2005 and 2004 were $0.71 and $0.57, respectively, an
increase of 24.6% in 2005 over 2004. The Companys average total assets increased to $468.8 million
in 2005 or 14.45% from $409.6 million in 2004. Deposits grew by $19.2 million or 5.5% primarily in
core deposits (checking and savings accounts). Net loans grew by $44.5 million or 14.0%.
Yields on portfolio loans increased 94 basis points to 7.14% compared to 6.20% in 2004. The yield
increase, coupled with the volume of loan growth represents the most significant increase in net
interest margin over the prior year. Yields on all earning assets increased 78 basis points to
6.32% compared to 5.54% in 2004. Likewise, funding costs increased 87 basis points to 2.24%
compared with 1.37% in 2004, primarily related to wholesale borrowing expense.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
The Company reported net income of $4.98 million for the year ended December 31, 2004,
representing an increase of approximately $796,000 or 19.0%, over net income of $4.18 million for
the year ended December 31, 2003. The primary factors contributing to the increase in net income
includes an increase of $2.2 million or 14.9% improvement in the net interest margin, a gain of
36.8% or $128,000 in service charges. Increases in the net interest margin are primarily attributed
to increases in the volume of earning assets coupled with reductions in the cost of funds.
Increases in service charges are a result of implementation of the overdraft privilege product.
The Companys provision for loan losses increased to $554,000 in 2004 from $515,000 in 2003. Growth
in the portfolio was the principal factor for current period provisions.
Return on average assets (ROA) was 1.22% and return on average common equity (ROE) was 18.18% in
2004 compared with 1.10% and 15.20% respectively in 2003, directly related to the increase in net
income. Diluted earnings per share for 2004 and 2003 were $0.58 and $0.50, respectively, an
increase of 16.0% in 2004 over 2003. The Companys average total assets increased to $409.6 million
in 2004 or 7.3% from $381.6 million in 2003. As a result of the continuing expansion of the
Companys Roseville Bank of Commerce, average deposits grew by $12.6 million or 4.4% primarily in
the business demand sector, further enhancing the cost of funds. Average net loans grew by $12.8
million or 4.5%.
Average gross volume processed through the loan portfolio grew by $40.8 million or 14.5% over the
prior year. Yields on portfolio loans remained consistent with prior year performance while
earnings on federal funds sold increased by 31 basis points. Deposit costs decreased by 24 basis
points providing the increase in net interest margin of 4.45% at December 31, 2004 compared to
4.22% at December 31, 2003.
31
Net Interest Income and Net Interest Margin
The primary source of income for the Company is derived from net interest income. Net interest
income represents the excess of interest and fees earned on assets (loans, securities and federal
funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets.
Net interest income increased to $20.2 million in 2005 versus $16.9 million in 2004 and $14.7
million in 2003, representing a 19.8% increase in 2005 over 2004, and a 15.0% increase in 2004 over
2003. The average balance of total earning assets increased to $440.8 million in 2005 compared to
$379.3 million in 2004 or 16.2% over 2004.
Yields on portfolio loans increased 94 basis points to 7.14% compared to 6.20% in 2004. The yield
increase, coupled with the volume of loan growth represents the most significant increase in net
interest margin over the prior year. Yields on all earning assets increased 78 basis points to
6.32% compared to 5.54% in 2004. Likewise, funding costs increased 87 basis points to 2.24%
compared with 1.37% in 2004, primarily related to wholesale borrowing expense.
The most significant impact on net interest income between periods is derived from the interaction
of changes in the volume of and rate earned or paid on interest-earning assets and interest-bearing
liabilities. The volume of interest-earning assets in loans and securities, compared to the volume
of interest-bearing liabilities represented by deposits and borrowings, combined with the spread,
produces the changes in net interest income between periods. The Companys net interest margin was
4.59% in 2005 and 4.45% in 2004. The combined effect of increasing the volume of earning assets and
repricing deposit liabilities resulted in an increase of $3.4 million or 19.8% in net interest
income for the year ended December 31, 2005 over 2004.
The following table sets forth the Companys daily average balance sheet, related interest income
or expense and yield or rate paid for the periods indicated. The yield on tax-exempt securities has
not been adjusted to a tax-equivalent yield basis.
Average Balances, Interest Income/Expense and Yields/Rates Paid
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Interest Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans |
|
$ |
337,284 |
|
|
$ |
24,070 |
|
|
|
7.14 |
% |
|
$ |
297,679 |
|
|
$ |
18,445 |
|
|
|
6.20 |
% |
|
$ |
284,841 |
|
|
$ |
17,655 |
|
|
|
6.20 |
% |
Tax-exempt securities |
|
|
9,966 |
|
|
|
332 |
|
|
|
3.33 |
% |
|
|
6,582 |
|
|
|
226 |
|
|
|
3.43 |
% |
|
|
3,832 |
|
|
|
140 |
|
|
|
3.65 |
% |
US government securities |
|
|
35,779 |
|
|
|
1,272 |
|
|
|
3.56 |
% |
|
|
28,220 |
|
|
|
781 |
|
|
|
2.77 |
% |
|
|
21,650 |
|
|
|
567 |
|
|
|
2.62 |
% |
Mortgage backed securities |
|
|
41,181 |
|
|
|
1,639 |
|
|
|
3.98 |
% |
|
|
36,159 |
|
|
|
1,394 |
|
|
|
3.86 |
% |
|
|
20,139 |
|
|
|
724 |
|
|
|
3.60 |
% |
Federal funds sold |
|
|
15,225 |
|
|
|
491 |
|
|
|
3.22 |
% |
|
|
10,304 |
|
|
|
143 |
|
|
|
1.39 |
% |
|
|
17,833 |
|
|
|
193 |
|
|
|
1.08 |
% |
Other securities |
|
|
1,384 |
|
|
|
60 |
|
|
|
4.34 |
% |
|
|
382 |
|
|
|
7 |
|
|
|
1.83 |
% |
|
|
0 |
|
|
|
0 |
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Earning Assets |
|
$ |
440,819 |
|
|
$ |
27,864 |
|
|
|
6.32 |
% |
|
$ |
379,326 |
|
|
$ |
20,996 |
|
|
|
5.54 |
% |
|
$ |
348,295 |
|
|
$ |
19,279 |
|
|
|
5.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & due from banks |
|
|
15,208 |
|
|
|
|
|
|
|
|
|
|
|
17,351 |
|
|
|
|
|
|
|
|
|
|
|
21,817 |
|
|
|
|
|
|
|
|
|
Bank premises and fixed assets |
|
|
5,563 |
|
|
|
|
|
|
|
|
|
|
|
5,373 |
|
|
|
|
|
|
|
|
|
|
|
5,538 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
7,172 |
|
|
|
|
|
|
|
|
|
|
|
7,519 |
|
|
|
|
|
|
|
|
|
|
|
5,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Total Assets |
|
$ |
468,762 |
|
|
|
|
|
|
|
|
|
|
$ |
409,569 |
|
|
|
|
|
|
|
|
|
|
$ |
381,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand |
|
$ |
112,236 |
|
|
$ |
939 |
|
|
|
0.84 |
% |
|
$ |
101,884 |
|
|
$ |
430 |
|
|
|
0.42 |
% |
|
$ |
94,677 |
|
|
$ |
464 |
|
|
|
0.49 |
% |
Savings deposits |
|
|
26,542 |
|
|
|
183 |
|
|
|
0.69 |
% |
|
|
23,384 |
|
|
|
104 |
|
|
|
0.44 |
% |
|
|
22,483 |
|
|
|
133 |
|
|
|
0.59 |
% |
Certificates of deposit |
|
|
149,204 |
|
|
|
4,331 |
|
|
|
2.90 |
% |
|
|
138,434 |
|
|
|
2,876 |
|
|
|
2.08 |
% |
|
|
146,152 |
|
|
|
3,571 |
|
|
|
2.44 |
% |
Other borrowings |
|
|
51,934 |
|
|
|
2,174 |
|
|
|
4.19 |
% |
|
|
35,880 |
|
|
|
699 |
|
|
|
1.95 |
% |
|
|
18,720 |
|
|
|
417 |
|
|
|
2.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest Liabilities |
|
$ |
339,916 |
|
|
|
7,627 |
|
|
|
2.24 |
% |
|
|
299,582 |
|
|
|
4,109 |
|
|
|
1.37 |
% |
|
|
282,032 |
|
|
|
4,585 |
|
|
|
1.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing Demand |
|
|
80,219 |
|
|
|
|
|
|
|
|
|
|
|
73,163 |
|
|
|
|
|
|
|
|
|
|
|
62,957 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
4,417 |
|
|
|
|
|
|
|
|
|
|
|
4,440 |
|
|
|
|
|
|
|
|
|
|
|
4,145 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
44,210 |
|
|
|
|
|
|
|
|
|
|
|
32,384 |
|
|
|
|
|
|
|
|
|
|
|
32,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Liabilities and
Stockholders equity |
|
$ |
468,762 |
|
|
|
|
|
|
|
|
|
|
$ |
409,569 |
|
|
|
|
|
|
|
|
|
|
$ |
381,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income and Net
Interest Margin |
|
|
|
|
|
$ |
20,237 |
|
|
|
4.59 |
% |
|
|
|
|
|
$ |
16,887 |
|
|
|
4.45 |
% |
|
|
|
|
|
$ |
14,694 |
|
|
|
4.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Interest income on loans includes fee income of approximately $556,000, $687,000 and $586,000
for the years ended December 31, 2005, 2004, and 2003 respectively. The Companys average total
assets increased to $468.8 million in 2005 to $409.6 million in 2004 and $381.6 million in 2003,
representing a 14.5% increase 2005 over 2004 and a 7.3% increase 2004 over 2003.
The following tables set forth changes in interest income and expense for each major category of
interest earning assets and interest-bearing liabilities, and the amount of change attributable to
volume and rate changes for the periods indicated. Changes not solely attributable to rate or
volume has been allocated to volume. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis.
Analysis of Changes in Net Interest Income
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2005 over 2004 |
|
|
|
|
|
|
2004 over 2003 |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Increase (Decrease)
In Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans |
|
$ |
2,826 |
|
|
$ |
2,799 |
|
|
$ |
5,625 |
|
|
$ |
801 |
|
|
$ |
(11 |
) |
|
$ |
790 |
|
Tax-exempt securities |
|
|
113 |
|
|
|
(7 |
) |
|
|
106 |
|
|
|
94 |
|
|
|
(8 |
) |
|
|
86 |
|
US government securities |
|
|
269 |
|
|
|
222 |
|
|
|
491 |
|
|
|
182 |
|
|
|
32 |
|
|
|
214 |
|
Mortgage backed securities |
|
|
200 |
|
|
|
45 |
|
|
|
245 |
|
|
|
619 |
|
|
|
51 |
|
|
|
670 |
|
Federal funds sold |
|
|
159 |
|
|
|
189 |
|
|
|
348 |
|
|
|
(105 |
) |
|
|
55 |
|
|
|
(50 |
) |
Other securities |
|
|
43 |
|
|
|
10 |
|
|
|
53 |
|
|
|
7 |
|
|
|
0 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) |
|
|
3,610 |
|
|
|
3,258 |
|
|
|
6,868 |
|
|
|
1,598 |
|
|
|
119 |
|
|
|
1,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase
In Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand |
|
|
87 |
|
|
|
422 |
|
|
|
509 |
|
|
|
30 |
|
|
|
(64 |
) |
|
|
(34 |
) |
Savings accounts |
|
|
22 |
|
|
|
57 |
|
|
|
79 |
|
|
|
4 |
|
|
|
(33 |
) |
|
|
(29 |
) |
Certificates of deposit |
|
|
313 |
|
|
|
1,142 |
|
|
|
1,455 |
|
|
|
(165 |
) |
|
|
(530 |
) |
|
|
(695 |
) |
Other borrowings |
|
|
672 |
|
|
|
803 |
|
|
|
1,475 |
|
|
|
335 |
|
|
|
(53 |
) |
|
|
282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (Decrease) Increase |
|
|
1,094 |
|
|
|
2,424 |
|
|
|
3,518 |
|
|
|
204 |
|
|
|
(680 |
) |
|
|
(476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase |
|
$ |
2,516 |
|
|
$ |
834 |
|
|
$ |
3,350 |
|
|
$ |
1,394 |
|
|
$ |
799 |
|
|
$ |
2,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Noninterest Income
The following table sets forth a summary of noninterest income for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
394 |
|
|
$ |
476 |
|
|
$ |
348 |
|
Payroll and benefit processing fees |
|
|
357 |
|
|
|
343 |
|
|
|
331 |
|
Earnings on cash surrender-
Bank owned life insurance |
|
|
209 |
|
|
|
259 |
|
|
|
233 |
|
Net realized gain on sale of
securities available-for-sale |
|
|
(2 |
) |
|
|
0 |
|
|
|
88 |
|
Net gain on sale of loans |
|
|
146 |
|
|
|
95 |
|
|
|
101 |
|
Merchant credit card service income, net |
|
|
346 |
|
|
|
434 |
|
|
|
408 |
|
Mortgage brokerage fee income |
|
|
249 |
|
|
|
186 |
|
|
|
251 |
|
Other income |
|
|
425 |
|
|
|
403 |
|
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest income |
|
$ |
2,124 |
|
|
$ |
2,196 |
|
|
$ |
2,150 |
|
|
|
|
|
|
|
|
|
|
|
The Companys noninterest income consists of payroll and benefit processing fees, processing fees
for merchants who accept credit card payments for goods and services, service charge on deposit
accounts, mortgage servicing fees and other service fees. For the year ended December 31, 2005,
non-interest income represented 7.1% of the Companys revenues (interest income plus noninterest
income) versus 9.5% in 2004 and 10.0% in 2003.
Service charges on deposit accounts decreased $82,000 or 17.3% over 2004 reflective of higher
earning allowances towards analysis fees. Mortgage brokerage fee income increased $63,000 or 33.9%
in 2005 compared to 2004 due to increased production. There was one sale of securities
available-for-sale during the year netting a loss of approximately $2,000. Gain on sale of loans
increased $51,000 or 53.7% due to increased volumes of loan sales. Total noninterest income in 2005
was $2.1 million compared to $2.2 million in 2004 and $2.2 million in 2003.
Noninterest Expense
The following table sets forth a summary of noninterest expense for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Salaries & related benefits |
|
$ |
6,884 |
|
|
$ |
5,938 |
|
|
$ |
5,451 |
|
Occupancy & equipment expense |
|
|
1,572 |
|
|
|
1,534 |
|
|
|
1,471 |
|
FDIC insurance premium |
|
|
49 |
|
|
|
48 |
|
|
|
49 |
|
Data processing fees |
|
|
303 |
|
|
|
254 |
|
|
|
217 |
|
Professional service fees |
|
|
649 |
|
|
|
803 |
|
|
|
654 |
|
Payroll processing fees |
|
|
111 |
|
|
|
0 |
|
|
|
0 |
|
Deferred compensation expense |
|
|
321 |
|
|
|
281 |
|
|
|
256 |
|
Stationery & supplies |
|
|
241 |
|
|
|
208 |
|
|
|
219 |
|
Postage |
|
|
104 |
|
|
|
97 |
|
|
|
103 |
|
Directors expenses |
|
|
220 |
|
|
|
267 |
|
|
|
241 |
|
Other expenses |
|
|
1,295 |
|
|
|
1,190 |
|
|
|
999 |
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest expense |
|
$ |
11,749 |
|
|
$ |
10,620 |
|
|
$ |
9,660 |
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense consists of salaries and related employee benefits, occupancy and equipment
expenses, data processing fees, professional fees, directors fees and other operating expenses.
The increase in operating expense for 2005 over 2004 is primarily due to salaries and benefits
reflective of the growth in assets in both the Redding and Roseville markets. Professional service
fees decreased $154,000 or 19.2% in 2005 over 2004 due to reduced legal expenses related to the
NASDAQ filing in 2004. Payroll processing fees, a new expense in 2005 represents web-based
computer enhancements to the payroll servicing product.
34
Noninterest expense for 2005 increased to $11.7 million compared to $10.6 million for 2004 and $9.7
million in 2003, representing an increase of $1,128,000 or 10.6% in 2005, and $960,000 or 9.94% in
2004.
Income Taxes
The Companys provision for income taxes includes both federal and state income taxes and
reflects the application of federal and state statutory rates to the Companys income before taxes.
The principal difference between statutory tax rates and the Companys effective tax rate is the
benefit derived from investing in tax-exempt securities and preferential state tax treatment for
qualified enterprise zone loans. Increases and decreases in the provision for taxes reflect
changes in the Companys income before taxes.
The following table reflects the Companys tax provision and the related effective tax rate
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Income tax provision |
|
$ |
3,887 |
|
|
$ |
2,931 |
|
|
$ |
2,487 |
|
Effective tax rate |
|
|
38.2 |
% |
|
|
37.1 |
% |
|
|
37.3 |
% |
|
Asset Quality
The Company concentrates its lending activities primarily within El Dorado, Placer,
Sacramento, Shasta, Tehama and Yuba counties, California, and the location of the Banks four full
services branches, specifically identified as Upstate California. The Company manages its credit
risk through diversification of its loan portfolio and the application of underwriting policies and
procedures and credit monitoring practices. Although The Company has a diversified loan portfolio,
a significant portion of its borrowers ability to repay the loans is dependent upon the
professional services and residential real estate development industry sectors. Generally, the
loans are secured by real estate or other assets located in California and are expected to be
repaid from cash flows of the borrower or proceeds from the sale of collateral.
The following table sets forth the amounts of loans outstanding by category as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
As of December 31, |
|
|
|
2005 |
|
|
% |
|
|
2004 |
|
|
% |
|
|
2003 |
|
|
% |
|
|
2002 |
|
|
% |
|
|
2001 |
|
|
% |
|
|
Commercial & financial |
|
$ |
115,401 |
|
|
|
31.36 |
% |
|
$ |
105,545 |
|
|
|
32.64 |
% |
|
$ |
104,509 |
|
|
|
37.01 |
% |
|
$ |
99,084 |
|
|
|
34.84 |
% |
|
$ |
76,913 |
|
|
|
34.96 |
% |
Real Estate-construction |
|
$ |
105,094 |
|
|
|
28.56 |
% |
|
|
77,439 |
|
|
|
23.95 |
% |
|
|
66,741 |
|
|
|
23.64 |
% |
|
|
40,662 |
|
|
|
14.29 |
% |
|
|
45,331 |
|
|
|
20.60 |
% |
Real Estate-commercial |
|
$ |
142,992 |
|
|
|
38.86 |
% |
|
|
135,260 |
|
|
|
41.83 |
% |
|
|
102,953 |
|
|
|
36.46 |
% |
|
|
124,210 |
|
|
|
43.67 |
% |
|
|
82,892 |
|
|
|
37.68 |
% |
Real Estate- mortgage |
|
$ |
3,669 |
|
|
|
1.00 |
% |
|
|
4,423 |
|
|
|
1.37 |
% |
|
|
7,086 |
|
|
|
2.51 |
% |
|
|
19,126 |
|
|
|
6.72 |
% |
|
|
13,725 |
|
|
|
6.23 |
% |
Installment |
|
$ |
439 |
|
|
|
0.12 |
% |
|
|
300 |
|
|
|
0.10 |
% |
|
|
451 |
|
|
|
0.16 |
% |
|
|
720 |
|
|
|
0.25 |
% |
|
|
440 |
|
|
|
0.20 |
% |
Other loans |
|
$ |
446 |
|
|
|
0.10 |
% |
|
|
353 |
|
|
|
0.11 |
% |
|
|
632 |
|
|
|
0.22 |
% |
|
|
662 |
|
|
|
0.23 |
% |
|
|
709 |
|
|
|
0.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans |
|
$ |
368,041 |
|
|
|
100.00 |
% |
|
|
323,320 |
|
|
|
100.00 |
% |
|
|
282,372 |
|
|
|
100.00 |
% |
|
|
284,464 |
|
|
|
100.00 |
% |
|
|
220,010 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees and
costs |
|
|
420 |
|
|
|
|
|
|
|
653 |
|
|
|
|
|
|
|
494 |
|
|
|
|
|
|
|
584 |
|
|
|
|
|
|
|
134 |
|
|
|
|
|
Allowance for Loan losses |
|
|
4,316 |
|
|
|
|
|
|
|
3,866 |
|
|
|
|
|
|
|
3,675 |
|
|
|
|
|
|
|
3,529 |
|
|
|
|
|
|
|
2,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans |
|
$ |
363,305 |
|
|
|
|
|
|
$ |
318,801 |
|
|
|
|
|
|
$ |
278,203 |
|
|
|
|
|
|
$ |
280,351 |
|
|
|
|
|
|
$ |
216,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net portfolio loans increased $44.5 million or 14.0%, to $363.3 million at December 31, 2005
over $318.8 million at December 31, 2004 primarily due to increased activity in construction and
the commercial real estate sector. During 2005, commercial and financial loans increased $9.8
million or 9.3% while the real estate related portfolio increased $34.7 million or 16.0%. The
portfolio mix shifted towards construction real estate in comparison to 2004, with real estate
construction of 28.6%, commercial real estate at 38.9% and commercial and financial loans of
approximately 31.9%. The Companys practice is to place an asset on nonaccrual status when one of
the following events occurs:(i) Any installment of principal or interest is 90 days or more past
due (unless in managements opinion the loan is well-secured and in the process of collection),
(ii) management determines the ultimate collection of principal or interest to be unlikely or (iii)
the terms of the loan have been renegotiated due to a serious weakening of the borrowers financial
condition. Nonperforming loans may be on nonaccrual, are 90 days past due and still accruing, or
have been restructured.
35
Nonperforming Assets
The following table sets forth a summary of the Companys nonperforming loans and other
assets as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
Nonaccrual loans |
|
$ |
372 |
|
|
$ |
2,383 |
|
|
$ |
3,931 |
|
|
$ |
0 |
|
|
$ |
59 |
|
90 days past due and
still accruing interest |
|
|
0 |
|
|
|
0 |
|
|
|
712 |
|
|
|
7 |
|
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
372 |
|
|
|
2,383 |
|
|
|
4,643 |
|
|
|
7 |
|
|
|
349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
338 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
372 |
|
|
$ |
2,383 |
|
|
$ |
4,643 |
|
|
$ |
345 |
|
|
$ |
349 |
|
|
Management believes that the Companys loan portfolio is sound and performing well. Nonaccrual
loans were decreased by $2.0 million or 84.4% during the year. The Companys OREO remained at $0
during 2005 and 2004.
Loan Maturity Schedule
The following table sets forth the maturity distribution of the Companys commercial, real
estate and other loans outstanding as of December 31, 2005, which, based on remaining scheduled
repayments of principal, were due within the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Within One Year |
|
|
through Five Years |
|
|
After Five Years |
|
|
Total |
|
|
Commercial & financial |
|
$ |
46,999 |
|
|
$ |
54,630 |
|
|
$ |
13,772 |
|
|
$ |
115,401 |
|
Real Estate construction |
|
|
101,188 |
|
|
|
3,565 |
|
|
|
341 |
|
|
|
105,094 |
|
Real Estate commercial |
|
|
124,671 |
|
|
|
8,116 |
|
|
|
10,205 |
|
|
|
142,992 |
|
Real Estate
mortgage |
|
|
732 |
|
|
|
214 |
|
|
|
2,723 |
|
|
|
3,669 |
|
Installment loans |
|
|
439 |
|
|
|
0 |
|
|
|
0 |
|
|
|
439 |
|
Other loans |
|
|
447 |
|
|
|
0 |
|
|
|
0 |
|
|
|
447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans |
|
$ |
274,476 |
|
|
$ |
66,525 |
|
|
$ |
27,041 |
|
|
$ |
368,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans due after one year
with: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rates |
|
|
|
|
|
$ |
18,281 |
|
|
$ |
20,318 |
|
|
$ |
38,599 |
|
Variable Rates |
|
|
|
|
|
|
48,244 |
|
|
|
6,723 |
|
|
|
54,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
66,525 |
|
|
$ |
27,041 |
|
|
$ |
93,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
The following table summarizes the contractual maturities of the Companys securities held as
available-for-sale at their amortized cost basis and their weighted-average yields at December 31,
2005. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over One through |
|
|
Over Five through |
|
|
Over |
|
|
|
|
|
|
Within One |
|
|
Five |
|
|
Ten |
|
|
Ten |
|
|
|
|
(Dollars in thousands) |
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
U.S. government & agencies |
|
$ |
5,501 |
|
|
|
2.70 |
% |
|
$ |
35,296 |
|
|
|
4.08 |
% |
|
$ |
2,997 |
|
|
|
4.02 |
% |
|
$ |
0 |
|
|
|
0.00 |
% |
|
$ |
43,794 |
|
|
|
3.93 |
% |
Obligations of state and
political subdivisions |
|
|
71 |
|
|
|
1.35 |
% |
|
|
1,209 |
|
|
|
2.30 |
% |
|
|
3,363 |
|
|
|
3.62 |
% |
|
|
1,705 |
|
|
|
3.57 |
% |
|
|
6,348 |
|
|
|
3.34 |
% |
Mortgage backed securities |
|
|
0 |
|
|
|
0.00 |
% |
|
|
2,953 |
|
|
|
3.34 |
% |
|
|
14,277 |
|
|
|
4.05 |
% |
|
|
24,788 |
|
|
|
4.34 |
% |
|
|
42,018 |
|
|
|
4.28 |
% |
Corporate and other bonds |
|
|
2,046 |
|
|
|
4.25 |
% |
|
|
2,000 |
|
|
|
4.48 |
% |
|
|
0 |
|
|
|
0.00 |
% |
|
|
0 |
|
|
|
0.00 |
% |
|
|
4,046 |
|
|
|
4.36 |
% |
Bankers Acceptances |
|
|
0 |
|
|
|
0.00 |
% |
|
|
0 |
|
|
|
0.00 |
% |
|
|
0 |
|
|
|
0.00 |
% |
|
|
0 |
|
|
|
0.00 |
% |
|
|
0 |
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,618 |
|
|
|
2.83 |
% |
|
$ |
41,458 |
|
|
|
4.00 |
% |
|
$ |
20,637 |
|
|
|
3.97 |
% |
|
$ |
26,493 |
|
|
|
4.30 |
% |
|
$ |
96,206 |
|
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Deposit Structure
The Company primarily obtains deposits from local businesses and professionals as well as
through certificates of deposits, savings and checking accounts. The following table sets forth the
distribution of the Companys average daily balances for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(Dollars in thousands) |
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
NOW accounts |
|
$ |
84,070 |
|
|
|
0.67 |
% |
|
$ |
75,154 |
|
|
|
0.30 |
% |
|
$ |
52,508 |
|
|
|
0.31 |
% |
Savings |
|
|
26,542 |
|
|
|
0.69 |
% |
|
|
23,384 |
|
|
|
0.44 |
% |
|
|
22,483 |
|
|
|
0.59 |
% |
Money market accounts |
|
|
28,166 |
|
|
|
1.32 |
% |
|
|
26,730 |
|
|
|
0.76 |
% |
|
|
42,169 |
|
|
|
0.74 |
% |
Certificates of deposit |
|
|
149,204 |
|
|
|
2.96 |
% |
|
|
138,434 |
|
|
|
2.08 |
% |
|
|
146,152 |
|
|
|
2.44 |
% |
Other borrowings |
|
|
51,934 |
|
|
|
3.04 |
% |
|
|
35,880 |
|
|
|
1.95 |
% |
|
|
18,720 |
|
|
|
2.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
|
339,916 |
|
|
|
|
|
|
|
299,582 |
|
|
|
|
|
|
|
282,032 |
|
|
|
|
|
Noninterest bearing deposits |
|
|
80,219 |
|
|
|
|
|
|
|
73,163 |
|
|
|
|
|
|
|
62,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
420,135 |
|
|
|
|
|
|
$ |
372,745 |
|
|
|
|
|
|
$ |
344,989 |
|
|
|
|
|
|
The following table sets forth the remaining maturities of certificates of deposit in amounts of
$100,000 or more as of December 31, 2005:
Deposit Maturity Schedule
|
|
|
|
|
(Dollars in thousands) |
|
2005 |
|
|
Three months or less |
|
$ |
42,826 |
|
Three through six months |
|
|
21,589 |
|
Six through twelve months |
|
|
21,589 |
|
Over twelve months |
|
|
9,897 |
|
|
|
|
|
Total |
|
$ |
95,901 |
|
|
|
|
|
Capital Management and Adequacy
The Company uses capital to fund organic growth, pay dividends and repurchase its
shares. The objective of effective capital management is to produce above market long-term returns
by using capital when returns are perceived to be high and issuing capital when costs are perceived
to be low. The Companys potential sources of capital include retained earnings, common and
preferred stock issuance, and issuance of subordinated debt and trust preferred securities.
Overall capital adequacy is monitored on a day-to-day basis by the Companys management and
reported to the Companys Board of Directors on a monthly basis. The regulators of the Bank
measure capital adequacy by using a risk-based capital framework and by monitoring compliance with
minimum leverage ratio guidelines. Under the risk-based capital standard, assets reported on the
Companys balance sheet and certain off-balance sheet items are assigned to risk categories, each
of which is assigned a risk weight.
This standard characterizes an institutions capital as being Tier 1 capital (defined as
principally comprising stockholders equity) and Tier 2 capital (defined as principally
comprising the qualifying portion of the ALLL). The minimum ratio of total risk-based capital to
risk-adjusted assets, including certain off-balance sheet items, is 8%. At least one-half (4%) of
the total risk-based capital is to be comprised of common equity; the balance may consist of
debt securities and a limited portion of the ALLL.
37
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and
Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to
average assets. Management believes as of December 31, 2005 and 2004, that the Company and the Bank
met all capital adequacy requirements to which they are subject.
As of December 31, 2005, the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, an institution must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.
There are no conditions or events since the notification that management believes have changed the
Banks category. The Companys and the Banks actual capital amounts and ratios as of December 31,
2005 are presented in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well |
|
|
Minimum |
|
|
|
|
|
|
|
Actual |
|
|
Capitalized |
|
|
Capital |
|
December 31, 2005 |
|
Capital |
|
|
Ratio |
|
|
Requirement |
|
|
Requirement |
|
The Company
Leverage |
|
$ |
50,427,990 |
|
|
|
10.19 |
% |
|
|
n/a |
|
|
|
4.0 |
% |
Tier 1 Risk-Based |
|
|
50,427,990 |
|
|
|
12.05 |
% |
|
|
n/a |
|
|
|
4.0 |
% |
Total Risk-Based |
|
|
54,744,369 |
|
|
|
13.09 |
% |
|
|
n/a |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redding Bank of
Commerce
Leverage |
|
$ |
50,530,699 |
|
|
|
10.22 |
% |
|
|
5.0 |
% |
|
|
4.0 |
% |
Tier 1 Risk-Based |
|
|
50,530,699 |
|
|
|
12.08 |
% |
|
|
6.0 |
% |
|
|
4.0 |
% |
Total Risk-Based |
|
|
54,841,378 |
|
|
|
13.11 |
% |
|
|
10.00 |
% |
|
|
8.0 |
% |
|
The Company paid a quarterly cash dividend of $0.06, $0.06 and $0.06 on April 8, 2005, July 8, 2005
and October 7, 2005, respectively, to stockholders of record as of March 31, 2005, June 30, 2005
and September 30, 2005, respectively. The fourth quarter dividend of $0.08 per share is payable to
shareholders of record as of December 31, 2005 to be paid on January 6, 2006.
Transactions with Related Parties
The Companys conduct of business with directors, officers, significant stockholders and
other related parties (collectively, Related Parties) is restricted and governed by various laws
and regulations, including Regulation O as promulgated and enforced by the Federal Reserve.
Furthermore, it is the Companys policy to conduct business with Related Parties on an arms length
basis at current market prices with terms and conditions no more favorable than the Company
provides in its normal course of business.
Some of the directors, officers and principal stockholders of the Company and their associates were
customers of and had banking transactions with the Bank in the ordinary course of the Banks
business during 2005 and the Bank expects to have such transactions in the future. All loans and
commitments to loans included in such transactions were made in compliance with the applicable laws
on substantially the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons of similar creditworthiness, and in the
opinion of the Company, did not involve more than a normal risk of collectibility or present other
unfavorable features.
An analysis of the activity in related party loans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Balance at beginning of year |
|
$ |
3,622,750 |
|
|
$ |
4,123,712 |
|
New loan additions |
|
|
11,318 |
|
|
|
541,097 |
|
Other additions |
|
|
0 |
|
|
|
0 |
|
Principal repayments |
|
|
(1,779,317 |
) |
|
|
(1,042,059 |
) |
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
1,854,751 |
|
|
$ |
3,622,750 |
|
|
|
|
|
|
|
|
38
Impact of Inflation
Inflation affects the Companys financial position as well as its operating results. It is
managements opinion that the effects of inflation for the three years ended December 31, 2005 on
the financial statements have not been material.
Commitments
Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company
enters various types of transactions, which involve financial instruments with off-balance sheet
risk. These instruments include commitments to extend credit and stand-by letters of credit, which
are not reflected in the consolidated balance sheets. These transactions may involve, to varying
degrees, credit and interest rate risk more than the amount, if any recognized in the consolidated
balance sheets.
The off-balance sheet credit risk exposure of the Company is the contractual amount of commitments
to extend credit and stand-by letters of credit. The Company applies the same credit standards to
these contracts as it uses for loans recorded on the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Off-balance sheet commitments: |
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
159,485,594 |
|
|
$ |
128,837,320 |
|
Standby letters of credit |
|
|
9,771,080 |
|
|
|
7,064,798 |
|
Commitments to extend credit are agreements to lend to customers. These commitments have specified
interest rates and generally have fixed expiration dates but may be terminated by the Company if
certain conditions of the contract are violated.
Although currently subject to draw down, many of the commitments do not necessarily represent
future cash requirements. Collateral held relating to these commitments varies, but generally
includes real estate, securities and cash.
Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Credit risk arises in these transactions from the
possibility that a customer may not be able to repay the Company upon default of performance.
Collateral held for standby letters of credit is based on an individual evaluation of each
customers creditworthiness, but may include cash and securities. Commitments to extend
credit and standby letters of credit bear similar credit risk characteristics as outstanding loans.
Commitments and Contingent Liabilities
The Company has certain financial commitments. Future financial commitments are outlined below:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
Contractual Obligations |
|
Total |
|
|
One Year |
|
|
1 -3 Years |
|
|
3 5 Years |
|
|
years |
|
Trust Preferred obligation |
|
$ |
15,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,310 |
|
FHLB Borrowings |
|
$ |
55,000 |
|
|
$ |
30,000 |
|
|
$ |
25,000 |
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
$ |
3,139 |
|
|
$ |
0 |
|
|
$ |
1,541 |
|
|
$ |
1,026 |
|
|
$ |
572 |
|
Repurchase Agreements |
|
$ |
22,886 |
|
|
$ |
22,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Certificates of Deposit |
|
$ |
149,256 |
|
|
$ |
69,230 |
|
|
$ |
79,630 |
|
|
$ |
396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
245,591 |
|
|
$ |
122,116 |
|
|
$ |
106,171 |
|
|
$ |
1,422 |
|
|
$ |
15,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk that values of assets and liabilities or revenues will be adversely
affected by changes in market conditions such as market movements. The risk is inherent in the
financial instruments associated with our operations and activities including loans, deposits,
securities, short-term borrowings, long-term debt and derivatives. Market-sensitive assets and
liabilities are generated through loans and deposits associated with our banking business, our
Asset Liability Management (ALM) process, and credit risk mitigation activities. Traditional loan
and deposit products are reported at amortized cost for assets or the amount owed for liabilities.
These positions are subject to changes in economic value based on varying market conditions.
Interest rate risk is the effect of changes in economic value of our loans and deposits, as well as
our other interest rate sensitive instruments and is reflected in the levels of future income and
expense produced by these positions versus levels that would be generated by current levels of
interest rates. We seek to mitigate interest rate risk as part of the ALM process.
Interest rate risk represents the most significant market risk exposure to our financial
instruments. Our overall goal is to manage interest rate sensitivity so that movements in interest
rates do not adversely affect net interest income. Interest rates risk is measured as the potential
volatility in our net interest income caused by changes in market interest rates. Lending and
deposit taking create interest rate sensitive positions on our balance sheet. Interest rate risk
from these activities as well as the impact of ever changing market conditions is mitigated using
the ALM process. The Company does not operate a trading account, currently does not hold any
financial derivatives and does not hold a position with exposure to foreign currency exchange or
commodities. The Company faces market risk through interest rate volatility.
The Board of Directors has overall responsibility for the Companys interest rate risk management
policies. The Company has an Asset/Liability Management Committee (ALCO) which establishes and
monitors guidelines to control the sensitivity of earnings to changes in interest rates. The
internal ALCO Roundtable group maintains a net interest income forecast using different rate
scenarios utilizing a simulation model. This group updates the net interest income forecast for
changing assumptions and differing outlooks based on economic and market conditions.
The simulation model used includes measures of the expected repricing characteristics of
administered rate (NOW, savings and money market accounts) and non-related products (demand deposit
accounts, other assets and other liabilities). These measures recognize the relative sensitivity of
these accounts to changes in market interest rates, as demonstrated through current and historical
experience, recognizing the timing differences of rate changes. In the simulation of net interest
margin and net income the forecast balance sheet is processed against five rate scenarios. These
five rate scenarios include a flat rate environment, which assumes interest rates are unchanged in
the future and four additional rate ramp scenarios ranging for +
200 to - 200 basis points in 100
basis point increments, unless the rate environment cannot move in these basis point increments
before reaching zero.
The formal policies and practices adopted by the Company to monitor and manage interest rate risk
exposure measure risk in two ways: (i) repricing opportunities for earning assets and
interest-bearing liabilities and (ii) changes in net interest income for declining interest rate
shocks of 100 to 200 basis points. Because of the Companys predisposition to variable rate,
pricing and noninterest bearing demand deposit accounts the Company is asset sensitive. As a
result, management anticipates that, in a declining interest rate environment, the Companys net
interest income and margin would be expected to decline, and, in an increasing interest rate
environment, the Companys net interest income and margin would be expected to increase. However,
no assurance can be given that under such circumstances the Company would experience the described
relationships to declining or increasing interest rates. Because the Company is asset sensitive,
the Company is adversely affected by declining rates rather than rising rates. At December 31, 2005
the Company remained positioned for future rising interest rates and curve flattening.
40
To estimate the effect of interest rate shocks on the Companys net interest income,
management uses a model to prepare an analysis of interest rate risk exposure. Such analysis
calculates the change in net interest income given a change in the federal funds rate of 100 or 200
basis points up or down. All changes are measured in dollars and are compared to projected net
interest income. At December 31, 2005, the estimated annualized reduction in net interest income
attributable to a 100 or 200 basis point decline in the federal funds rate was $1,480,382 and
$3,139,893, respectively, compared with $1,379,244 and $2,638,008 at December 31, 2004,
respectively. A similar and opposite result is attributable to a 100 or 200 basis point increase in
the federal fund rate. The ALCO has established a policy limitation to interest rate risk of -14%
of net interest margin and -12% of the present value of equity.
The securities portfolio is integral to our asset liability management process. The decision to
purchase or sell securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment, liquidity, regulatory requirements and the
relative mix of our cash positions.
The following table sets forth, as of December 31, 2005, the distribution of repricing
opportunities for the Companys earning assets and interest-bearing liabilities. It also reports
the GAP (different volumes of rate sensitive assets and liabilities) repricing interest earning
assets and interest-bearing liabilities at different time intervals, the cumulative GAP, the ratio
of rate sensitive assets to rate sensitive liabilities for each repricing interval, and the
cumulative GAP to total assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
At December 31, 2005 |
|
|
Within 3 |
|
|
3 Months to |
|
|
One Year to |
|
|
|
|
|
|
|
|
|
|
Months |
|
|
One Year |
|
|
Five Years |
|
Over Five Years |
|
|
Total |
|
|
Interest-Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities |
|
$ |
130 |
|
|
$ |
|
|
|
$ |
1,882 |
|
|
$ |
4,921 |
|
|
$ |
6,933 |
|
Available-for-sale securities |
|
|
2,900 |
|
|
|
10,366 |
|
|
|
47,469 |
|
|
|
33,279 |
|
|
|
94,014 |
|
Federal funds sold |
|
|
9,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,120 |
|
Loans, net |
|
|
283,022 |
|
|
|
30,653 |
|
|
|
46,399 |
|
|
|
3,232 |
|
|
|
363,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-earning Assets |
|
$ |
295,172 |
|
|
$ |
41,019 |
|
|
$ |
95,750 |
|
|
$ |
41,432 |
|
|
$ |
473,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Interest bearing |
|
$ |
|
|
|
|
15,201 |
|
|
$ |
62,420 |
|
|
$ |
31,480 |
|
|
$ |
109,101 |
|
Savings Accounts |
|
|
|
|
|
|
|
|
|
|
16,524 |
|
|
|
11,016 |
|
|
|
27,540 |
|
Certificates of deposit |
|
|
87,667 |
|
|
|
48,680 |
|
|
|
12,879 |
|
|
|
30 |
|
|
|
149,256 |
|
Repurchase Agreements |
|
|
22,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,886 |
|
Other borrowings |
|
|
8,333 |
|
|
|
22,917 |
|
|
|
23,750 |
|
|
|
|
|
|
|
55,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-bearing Liabilities |
|
$ |
118,886 |
|
|
$ |
86,798 |
|
|
$ |
115,573 |
|
|
$ |
42,526 |
|
|
$ |
363,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP in dollars |
|
$ |
176,286 |
|
( |
$ |
45,779 |
) |
( |
$ |
19,823 |
) |
( |
$ |
1,094 |
) |
|
$ |
109,590 |
|
Cumulative GAP in dollars |
|
|
|
|
|
$ |
130,507 |
|
|
$ |
110,684 |
|
|
$ |
109,590 |
|
|
|
|
|
As a percentage of earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP Ratio |
|
|
2.48 |
|
|
|
0.47 |
|
|
|
0.83 |
|
|
|
0.97 |
|
|
|
1.30 |
|
Cumulative GAP Ratio |
|
|
2.48 |
|
|
|
-1.12 |
|
|
|
-0.21 |
|
|
|
-0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap as % of Earning Assets |
|
|
37.24 |
% |
|
|
-9.67 |
% |
|
|
-4.19 |
% |
|
|
-0.23 |
% |
|
|
23.15 |
% |
Cumulative Gap as % of Earning
Assets |
|
|
37.24 |
% |
|
|
27.57 |
% |
|
|
23.38 |
% |
|
|
23.15 |
% |
|
|
23.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits |
|
$ |
39,414 |
|
|
$ |
946 |
|
|
$ |
27,472 |
|
|
$ |
18,387 |
|
|
$ |
86,219 |
|
|
The model utilized by management to create the analysis described in the preceding paragraph
uses balance sheet simulation to estimate the impact of changing rates on the projected annual net
interest income of the Company. Actual results will differ from simulated results due to timing,
magnitude, and frequency of interest rate changes as well as changes in market conditions and
management strategies. Management believes that the short duration of its rate-sensitive assets and
liabilities contributes to its ability to reprice a significant amount of its rate-sensitive assets
and liabilities and mitigate the impact of rate changes in excess of 100 or 200 basis points. The
models primary benefit to management is its assistance in evaluating the impact that future
strategies with respect to the Companys mix and level of rate-sensitive assets and liabilities
will have on the Companys net interest income.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Directors of
Bank of Commerce Holdings
We have audited the accompanying consolidated balance sheet of Bank of Commerce Holdings and
subsidiaries (the Company) as of December 31, 2005 and December 31, 2004 and the related
consolidated statements of income, stockholders equity, and cash flows for the two years in the
period ended December 31, 2005. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Bank of Commerce Holdings and subsidiaries as of December 31,
2005 and December 31, 2004, and the results of their operations and their cash flows for the year
ended December 31, 2005 and December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
Stockton, California
March 3, 2006
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Directors of
Bank of Commerce Holdings:
We have audited the consolidated statements of income, stockholders equity, and cash flows of Bank
of Commerce Holdings (formerly Redding Bancorp) and subsidiaries (the Company) for the year ended
December 31, 2003. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the results of operations of Bank of Commerce Holdings and subsidiaries and their cash flows for
the year ended December 31, 2003, in conformity with accounting principles generally accepted in
the United States of America.
San Francisco, California
February 24, 2004
(February 24, 2005 as to the effects of the stock split described in Note 2)
44
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
17,435,887 |
|
|
$ |
13,120,951 |
|
Federal funds sold and securities purchased under agreements to resell |
|
|
9,120,000 |
|
|
|
6,120,000 |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
26,555,887 |
|
|
|
19,240,951 |
|
Securities available-for-sale (including pledged collateral of
$50,102,000 at December 31, 2005 and $35,345,000 at
December 31, 2004) |
|
|
94,014,027 |
|
|
|
82,443,193 |
|
Securities held-to-maturity, at cost
(estimated fair value of $6,881,172 at December 31 2005
and $487,092 at December 31, 2004) |
|
|
6,932,652 |
|
|
|
448,753 |
|
Loans, net of the allowance for loan and lease losses of $4,316,379
at December 31, 2005 and $3,866,498 at December 31, 2004 |
|
|
363,305,161 |
|
|
|
318,800,587 |
|
Bank premises and equipment, net |
|
|
5,630,684 |
|
|
|
5,484,196 |
|
Other assets |
|
|
15,205,234 |
|
|
|
12,127,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
511,643,645 |
|
|
$ |
438,544,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Demand noninterest bearing |
|
$ |
86,219,092 |
|
|
$ |
82,262,500 |
|
Demand interest bearing |
|
|
109,100,520 |
|
|
|
108,644,844 |
|
Savings accounts |
|
|
27,539,918 |
|
|
|
23,471,100 |
|
Certificates of deposit |
|
|
149,256,239 |
|
|
|
138,499,839 |
|
|
|
|
|
|
|
|
Total Deposits |
|
|
372,115,769 |
|
|
|
352,878,283 |
|
|
Securities sold under agreements to repurchase |
|
|
22,885,658 |
|
|
|
2,003,712 |
|
Federal Home Loan Bank borrowings |
|
|
55,000,000 |
|
|
|
35,000,000 |
|
Other liabilities |
|
|
7,194,315 |
|
|
|
8,379,475 |
|
Junior subordinated debt payable to unconsolidated
subsidiary grantor trust |
|
|
15,310,000 |
|
|
|
5,000,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
472,505,742 |
|
|
|
403,261,470 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 17) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, no par value; 2,000,000 shares authorized;
no shares issued and outstanding in 2005 and 2004 |
|
|
|
|
|
|
|
|
Common stock, no par value; 10,000,000 shares
authorized; 8,657,896 shares issued and outstanding in 2005
and 8,502,831 shares issued and outstanding in 2004 |
|
|
11,009,346 |
|
|
|
10,536,562 |
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
29,418,643 |
|
|
|
25,079,522 |
|
Accumulated other comprehensive (loss) income, net of tax |
|
|
(1,290,086 |
) |
|
|
(332,747 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
39,137,903 |
|
|
|
35,283,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
511,643,645 |
|
|
$ |
438,544,807 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
24,069,980 |
|
|
$ |
18,444,703 |
|
|
$ |
17,655,479 |
|
Interest on tax-exempt securities |
|
|
332,385 |
|
|
|
225,976 |
|
|
|
139,895 |
|
Interest on U.S. government securities |
|
|
2,910,695 |
|
|
|
2,175,274 |
|
|
|
1,290,481 |
|
Interest on federal funds sold and securities purchased
under agreement to resell |
|
|
491,019 |
|
|
|
143,449 |
|
|
|
193,089 |
|
Interest on other securities |
|
|
59,909 |
|
|
|
6,788 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
27,863,988 |
|
|
|
20,996,190 |
|
|
|
19,278,944 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
938,532 |
|
|
|
429,699 |
|
|
|
463,708 |
|
Interest on savings deposits |
|
|
182,994 |
|
|
|
103,670 |
|
|
|
132,758 |
|
Interest on certificates of deposit |
|
|
4,331,468 |
|
|
|
2,876,236 |
|
|
|
3,570,686 |
|
Interest on FHLB and other borrowings |
|
|
1,592,516 |
|
|
|
449,432 |
|
|
|
233,649 |
|
Interest on junior subordinated debt payable to
unconsolidated subsidiary grantor trust |
|
|
580,935 |
|
|
|
250,495 |
|
|
|
183,805 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
7,626,445 |
|
|
|
4,109,532 |
|
|
|
4,584,606 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
20,237,543 |
|
|
|
16,886,658 |
|
|
|
14,694,338 |
|
Provision for loan and lease losses |
|
|
447,700 |
|
|
|
554,000 |
|
|
|
515,000 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease
losses |
|
|
19,789,843 |
|
|
|
16,332,658 |
|
|
|
14,179,338 |
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
393,661 |
|
|
|
475,971 |
|
|
|
348,086 |
|
Payroll and benefit processing fees |
|
|
356,957 |
|
|
|
343,086 |
|
|
|
331,492 |
|
Earnings on
cash surrender value
Bank owned life insurance |
|
|
209,322 |
|
|
|
258,539 |
|
|
|
233,094 |
|
Net (loss) gain on sale of securities available-for-sale |
|
|
(1,537 |
) |
|
|
0 |
|
|
|
88,395 |
|
Net gain on sale of loans |
|
|
145,594 |
|
|
|
94,878 |
|
|
|
101,005 |
|
Merchant credit card service income, net |
|
|
345,721 |
|
|
|
433,822 |
|
|
|
407,945 |
|
Mortgage brokerage fee income |
|
|
249,049 |
|
|
|
186,188 |
|
|
|
250,451 |
|
Other income |
|
|
424,973 |
|
|
|
403,437 |
|
|
|
389,698 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
2,123,740 |
|
|
|
2,195,921 |
|
|
|
2,150,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
6,883,754 |
|
|
|
5,938,672 |
|
|
|
5,450,874 |
|
Occupancy and equipment expense |
|
|
1,572,458 |
|
|
|
1,534,490 |
|
|
|
1,470,722 |
|
FDIC insurance premium |
|
|
48,659 |
|
|
|
47,843 |
|
|
|
49,431 |
|
Data processing fees |
|
|
303,316 |
|
|
|
253,895 |
|
|
|
217,169 |
|
Professional service fees |
|
|
648,871 |
|
|
|
802,742 |
|
|
|
653,698 |
|
Payroll processing fees |
|
|
110,376 |
|
|
|
0 |
|
|
|
0 |
|
Deferred compensation expense |
|
|
321,321 |
|
|
|
280,771 |
|
|
|
255,612 |
|
Stationery and supplies |
|
|
241,144 |
|
|
|
208,102 |
|
|
|
219,473 |
|
Postage |
|
|
104,439 |
|
|
|
96,780 |
|
|
|
102,650 |
|
Directors expenses |
|
|
219,687 |
|
|
|
266,911 |
|
|
|
241,384 |
|
Other expenses |
|
|
1,294,684 |
|
|
|
1,189,790 |
|
|
|
999,157 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
11,748,709 |
|
|
|
10,619,996 |
|
|
|
9,660,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
10,164,874 |
|
|
|
7,908,583 |
|
|
|
6,669,334 |
|
Provision for income taxes |
|
|
3,886,504 |
|
|
|
2,930,908 |
|
|
|
2,486,658 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
6,278,370 |
|
|
$ |
4,977,675 |
|
|
$ |
4,182,676 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.73 |
|
|
$ |
0.60 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
8,600,270 |
|
|
|
8,282,588 |
|
|
|
8,033,484 |
|
Diluted earnings per share |
|
$ |
0.71 |
|
|
$ |
0.57 |
|
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted |
|
|
8,844,626 |
|
|
|
8,702,611 |
|
|
|
8,326,908 |
|
See accompanying notes to consolidated financial statements.
46
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive |
|
|
|
|
|
|
Comprehensive |
|
|
Common |
|
|
Stock |
|
|
Retained |
|
|
Income (Loss), |
|
|
|
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
net of tax |
|
|
Total |
|
Balance at January 01, 2003 |
|
|
|
|
|
|
7,924,608 |
|
|
$ |
8,714,767 |
|
|
$ |
18,813,703 |
|
|
$ |
138,660 |
|
|
$ |
27,667,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
4,182,676 |
|
|
|
|
|
|
|
|
|
|
|
4,182,676 |
|
|
|
|
|
|
|
4,182,676 |
|
Other
Comprehensive Income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities, net
of reclassification adjustment |
|
|
(347,918 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification adjustment for
gains included in net
income, net of tax |
|
|
(55,441 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income |
|
|
(403,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(403,359 |
) |
|
|
(403,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
$ |
3,779,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.22 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( 1,760,239 |
) |
|
|
|
|
|
|
(1,760,239 |
) |
Compensation expense associated with stock options |
|
|
|
|
|
|
|
|
|
|
22,404 |
|
|
|
|
|
|
|
|
|
|
|
22,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
|
|
|
|
205,566 |
|
|
|
621,452 |
|
|
|
|
|
|
|
|
|
|
|
621,452 |
|
Tax benefit on exercise of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,129 |
|
|
|
|
|
|
|
181,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
|
|
|
|
8,130,174 |
|
|
$ |
9,358,623 |
|
|
$ |
21,417,269 |
|
|
($ |
264,699 |
) |
|
$ |
30,511,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
4,977,675 |
|
|
|
|
|
|
|
|
|
|
|
4,977,675 |
|
|
|
|
|
|
|
4,977,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income,
net of tax
Unrealized losses on securities, net of
reclassification adjustment |
|
|
(68,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification adjustment
for gains included in net
income, net of tax |
|
|
(0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income |
|
|
(68,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,048 |
) |
|
|
(68,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
$ |
4,909,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.23 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( 1,955,584 |
) |
|
|
|
|
|
|
( 1,955,584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense associated with stock options |
|
|
|
|
|
|
|
|
|
|
3,856 |
|
|
|
|
|
|
|
|
|
|
|
3,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
|
|
|
|
372,657 |
|
|
|
1,174,083 |
|
|
|
|
|
|
|
|
|
|
|
1,174,083 |
|
Tax benefit on exercise of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
640,162 |
|
|
|
|
|
|
|
640,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
|
|
|
|
8,502,831 |
|
|
$ |
10,536,562 |
|
|
$ |
25,079,522 |
|
|
($ |
332,747 |
) |
|
$ |
35,283,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continues)
See accompanying notes to the consolidated financial statements.
47
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive |
|
|
|
|
|
|
Comprehensive |
|
|
Common |
|
|
Stock |
|
|
Retained |
|
|
Income(Loss), |
|
|
|
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
net of tax |
|
|
Total |
|
Balance at December 31, 2004 |
|
|
|
|
|
|
8,502,831 |
|
|
$ |
10,536,562 |
|
|
$ |
25,079,522 |
|
|
($ |
332,747 |
) |
|
$ |
35,283,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
6,278,370 |
|
|
|
|
|
|
|
|
|
|
|
6,278,370 |
|
|
|
|
|
|
|
6,278,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities,
net
of reclassification adjustment |
|
|
(956,436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification adjustment
for gains included in net
income, net of tax |
|
|
(903 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income |
|
|
(957,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(957,339 |
) |
|
|
(957,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
$ |
5,321,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($0.26 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( 2,243,347 |
) |
|
|
|
|
|
|
(2,243,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense associated with
stock options |
|
|
|
|
|
|
|
|
|
|
5,784 |
|
|
|
|
|
|
|
|
|
|
|
5,785 |
|
Stock options exercised |
|
|
|
|
|
|
155,065 |
|
|
|
467,000 |
|
|
|
|
|
|
|
|
|
|
|
467,000 |
|
Tax benefit on exercise of options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304,098 |
|
|
|
|
|
|
|
304,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
|
|
|
|
8,657,896 |
|
|
$ |
11,009,346 |
|
|
$ |
29,418,643 |
|
|
($ |
1,290,086 |
) |
|
$ |
39,137,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,278,370 |
|
|
$ |
4,977,675 |
|
|
$ |
4,182,676 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
447,700 |
|
|
|
554,000 |
|
|
|
515,000 |
|
Provision for depreciation and amortization |
|
|
564,779 |
|
|
|
610,997 |
|
|
|
691,859 |
|
Compensation expense associated with stock options |
|
|
5,784 |
|
|
|
3,856 |
|
|
|
22,404 |
|
Loss (Gain) on sale of securities available-for-sale |
|
|
1,537 |
|
|
|
0 |
|
|
|
(88,395 |
) |
Amortization of securities premiums and accretion
of discounts, net |
|
|
96,188 |
|
|
|
272,479 |
|
|
|
325,112 |
|
Gain on sale of loans |
|
|
(145,594 |
) |
|
|
(94,878 |
) |
|
|
(101,005 |
) |
Gain on sale of fixed assets |
|
|
(50 |
) |
|
|
(50 |
) |
|
|
(2,036 |
) |
Proceeds from sale of loans |
|
|
3,645,594 |
|
|
|
1,664,878 |
|
|
|
1,193,689 |
|
Loans originated for sale |
|
|
(3,500,000 |
) |
|
|
(1,570,000 |
) |
|
|
(1,092,684 |
) |
Deferred income taxes |
|
|
(398,727 |
) |
|
|
(314,555 |
) |
|
|
(514,197 |
) |
Effect of changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
(1,776,933 |
) |
|
|
1,912,172 |
|
|
|
(364,438 |
) |
Deferred loan fees |
|
|
(232,565 |
) |
|
|
158,604 |
|
|
|
(89,540 |
) |
Other liabilities |
|
|
(1,573,694 |
) |
|
|
4,699,608 |
|
|
|
479,422 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,412,389 |
|
|
|
12,874,786 |
|
|
|
5,157,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of available-for-sale securities |
|
|
23,560,650 |
|
|
|
32,797,174 |
|
|
|
20,115,204 |
|
Proceeds from sale of available-for-sale securities |
|
|
141,270 |
|
|
|
0 |
|
|
|
15,244,634 |
|
Purchases of available-for-sale securities |
|
|
(37,224,733 |
) |
|
|
(45,599,957 |
) |
|
|
(73,979,119 |
) |
Purchases of held-to-maturity securities |
|
|
(6,540,000 |
) |
|
|
0 |
|
|
|
0 |
|
Maturities of held-to-maturity securities |
|
|
50,569 |
|
|
|
948,022 |
|
|
|
1,025,791 |
|
Loan originations, net of principal repayments |
|
|
(44,719,709 |
) |
|
|
(41,348,638 |
) |
|
|
1,721,867 |
|
Purchase of Bank premises and equipment, net |
|
|
(711,217 |
) |
|
|
(282,354 |
) |
|
|
(1,017,857 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(65,443,170 |
) |
|
|
(53,485,753 |
) |
|
|
(36,889,480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in demand deposits and savings accounts |
|
|
8,481,086 |
|
|
|
26,909,207 |
|
|
|
23,252,044 |
|
Net increase (decrease) in certificates of deposit |
|
|
10,756,400 |
|
|
|
(1,569,567 |
) |
|
|
(10,160,051 |
) |
Increase (decrease) in securities sold under
agreements to repurchase |
|
|
20,881,946 |
|
|
|
(1,745,085 |
) |
|
|
44,412 |
|
Proceeds from Federal Home Loan Bank advances |
|
|
88,000,000 |
|
|
|
95,000,000 |
|
|
|
55,000,000 |
|
Repayments of Federal Home Loan Bank advances |
|
|
(68,000,000 |
) |
|
|
(90,000,000 |
) |
|
|
(43,000,000 |
) |
Junior subordinated debt payable to unconsolidated
subsidiary grantor trust |
|
|
10,310,000 |
|
|
|
0 |
|
|
|
5,000,000 |
|
Cash dividends |
|
|
(1,550,715 |
) |
|
|
(1,955,584 |
) |
|
|
(1,760,239 |
) |
Equity transactions, net |
|
|
467,000 |
|
|
|
1,174,083 |
|
|
|
802,582 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
69,345,717 |
|
|
|
27,813,054 |
|
|
|
29,178,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
7,314,936 |
|
|
|
(12,797,913 |
) |
|
|
(2,552,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
19,240,951 |
|
|
|
32,038,864 |
|
|
|
34,591,729 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
26,555,887 |
|
|
$ |
19,240,951 |
|
|
$ |
32,038,864 |
|
|
|
|
|
|
|
|
|
|
|
49
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
3,755,000 |
|
|
$ |
1,959,700 |
|
|
$ |
2,258,200 |
|
Interest |
|
$ |
7,467,150 |
|
|
$ |
4,083,048 |
|
|
$ |
4,655,112 |
|
See accompanying notes to consolidated financial statements.
50
BANK OF
COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
1. |
|
THE BUSINESS OF THE COMPANY |
Bank of Commerce Holdings (the Holding Company), is a financial
holding company (FHC) with its principal offices in Redding, California. A financial
holding company may engage in commercial banking, insurance, securities business and offer
other financial products to customers. The Company received notification from the Federal
Reserve Board approving the election to change to a financial holding company on April 22,
2001. The election to change to a financial holding company has had no impact to date on the
operations of the Company. As a financial holding company, Bank of Commerce Holdings is
subject to the Financial Holding Company Act and to supervision by the Board of Governors of
the Federal Reserve System (the FRB). The Holding Companys wholly-owned subsidiaries are
Redding Bank of Commerce (the Bank) and Bank of Commerce Mortgage, (collectively the
Company). The Company has an unconsolidated subsidiary in Bank of Commerce Holdings Trust
I and Bank of Commerce Holdings Trust II. Bank of Commerce Mortgage offers mortgage
brokerage services through an affiliate agreement with BWC Mortgage Services, an affiliate
of Bank of Walnut Creek. The Bank is principally supervised and regulated by the California
Department of Financial Institutions (DFI) and the Federal Deposit Insurance Corporation
(FDIC). Substantially all of the Companys activities are carried out through the Bank.
The Bank was incorporated as a California banking corporation on November 25, 1981. The
Bank operates four full service branches in Redding and Roseville, California, a suburb of
the greater Sacramento metro area. A fifth office in the Yuba City, California market is
scheduled to open in the first quarter of 2006.
The Bank conducts a general commercial banking business in the counties of El Dorado,
Placer, Shasta, Sacramento, Tehama and Yuba, California. The Company considers California to
be the major market area of the Bank. The services offered by the Bank include those
traditionally offered by commercial banks of similar size and character in California,
including checking, interest-bearing (NOW) and savings accounts, money market deposit
accounts; commercial, real estate, and construction loans; travelers checks, safe deposit
boxes, collection services and electronic banking activities. The primary focus of the Bank
is to provide services to the business and professional community of its major market area,
including Small Business Administration loans, payroll and accounting packages, benefit
administration and billing programs. The Bank does not offer trust services or international
banking services and does not plan to do so in the near future. Most of the customers of the
Bank are small to medium sized businesses and individuals with medium to high net worth.
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The accounting and reporting policies of the Company conform with accounting principles
generally accepted in the United States of America and general practices within the banking
industry. In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Certain amounts for prior periods
have been reclassified to conform to the current financial statement presentation. All
references to share and per share information have been adjusted to reflect the July 21,
2004 three-for-one stock split on a retroactive basis. The more significant accounting and
reporting policies and estimates applied in the preparation of the accompanying consolidated
financial statements are discussed below.
Principles of Consolidation - The consolidated financial statements include the accounts of
the Holding Company, the Bank and Bank of Commerce Mortgage. All significant intercompany
balances and transactions have been eliminated in consolidation.
51
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Cash
and Cash Equivalents For purposes of reporting cash flows, cash and cash
equivalents include amounts due from correspondent banks and the Federal Reserve Bank,
federal funds sold and securities purchased under agreements to resell. Generally, federal
funds sold are for a one-day period and securities purchased under agreements to resell are
for no more than a 90-day period.
Securities
purchased under agreements to resell The Company enters into purchases of
securities under agreements to resell substantially identical securities. Securities
purchased under agreements to resell consist primarily of U.S. Treasury and Agency
securities. The amounts advanced under these agreements are reflected as assets in the
consolidated balance sheet. It is the Companys policy to take possession of securities
purchased under agreements to resell. Agreements with third parties specify the Companys
rights to request additional collateral, based on its monitoring of the fair value of the
underlying securities on a daily basis. The securities are delivered by appropriate entry
into the Companys account maintained at the Federal Reserve Bank or into a third-party
custodians account designated by the Company under a written custodial agreement that
explicitly recognizes the Companys interest in the securities. In general, these
agreements mature within 90 days and no material amount of agreements to resell securities
purchased is outstanding with any individual dealer.
Securities
At the time of purchase, the Company designates the security as
held-to-maturity or available-for-sale, based on its investment objectives, operational
needs and intent to hold. The Company does not engage in trading activity. Securities
designated as held-to-maturity are carried at cost adjusted for the accretion of discounts
and amortization of premiums. The Company has the ability and intent to hold these
securities to maturity. Securities designated as available-for-sale may be sold to implement
the Companys asset/liability management strategies and in response to changes in interest
rates, prepayment rates and similar factors. Securities designated as available-for-sale are
recorded at fair value and unrealized gains or losses, net of income taxes, are reported as
part of accumulated other comprehensive income(loss), a separate component of stockholders
equity. Gains or losses on sale of securities are based on the specific identification
method. The market value and underlying rating of the security is monitored for quality.
Securities may be adjusted to reflect changes in valuation as a result of
other-than-temporary declines in value. Investments with fair values that are less than
amortized cost are considered impaired. Impairment may result from either a decline in the
financial condition of the issuing entity or, in the case of fixed rate investments, from
changes in interest rates. At each financial statement date, management assesses each
investment to determine if impaired investments are temporarily impaired or if the
impairment is other than temporary based upon the positive and negative evidence available.
Evidence evaluated includes, but is not limited to, industry analyst reports, credit market
conditions, and interest rate trends. If negative evidence outweighs positive evidence that
the carrying amount is recoverable within a reasonable period of time, the impairment is
deemed other-than-temporary and the security is written down in the period in which such
determination is made.
Loans Loans are stated at the principal amounts outstanding less deferred loan fees and
costs and the allowance for loan losses. Interest on commercial, installment and real
estate loans is accrued daily based on the principal outstanding. Loan origination and
commitment fees and certain origination costs are deferred and the net amount is amortized
over the contractual life of the loans as an adjustment of their yield. A loan is impaired
when, based on current information and events, management believes it is probable that the
Company will not be able to collect all amounts due according to the contractual terms of
the loan agreement. Impairment is measured based upon the present value of future cash flows
discounted at the loans effective rate, the loans observable market price, or the fair
value of collateral if the loan is collateral dependent. Interest on impaired loans is
recognized on a cash basis, and only when the principal is not considered impaired.
52
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
The Companys practice is to place an asset on nonaccrual status when one of the
following events occurs: (i) Any installment of principal or interest is 90 days or more
past due (unless in managements opinion the loan is well-secured and in the process of
collection), (ii) management determines the ultimate collection of principal or interest to
be unlikely or (iii) the terms of the loan have been renegotiated due to a serious weakening
of the borrowers financial condition. Nonperforming loans may be on nonaccrual, are 90 days
past due and still accruing, or have been restructured. Accruals are resumed on loans only
when they are brought fully current with respect to interest and principal and when the loan
is estimated to be fully collectible. Restructured loans are those loans on which
concessions in terms have been granted because of the borrowers financial or legal
difficulties. Interest is generally accrued on such loans in accordance with the new terms.
Allowance for Loan and Lease Losses The allowance for loan and lease losses are
established through a provision charged to expense. Loans are charged off against the
allowance for loan losses when management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management believes will be adequate to absorb
losses inherent in existing loans and overdrafts based on evaluations of collectibility and
prior loss experience. The evaluations take into consideration such factors as changes in
the nature and volume of the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, and current economic conditions that may affect the borrowers
ability to pay. Material estimates relating to the determination of the allowance for loan
losses are particularly susceptible to significant change in the near term. While management
uses available information to recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions. In addition, the FDIC and DFI, as
an integral part of their examination process, periodically review the Banks allowance for
loan losses. The FDIC may require the Bank to recognize additions to the allowance based on
their judgment about information available to them at the time of their examination.
Bank Premises and Equipment Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets. Expenditures for major renewals and
improvements are capitalized and those for maintenance and repairs are charged to expense as
incurred.
Securities Sold under Agreements to Repurchase At December 31, 2005 and 2004, securities
sold under agreements to repurchase consist of commercial repurchase agreements, where the
Company has an agreement with the depositor to sell and repurchase, on a daily basis, a
proportionate interest in US Government and Agency securities. These securities are held as
collateral for non-FDIC insured deposits.
Federal Home Loan Bank Borrowings As part of its asset/liability management strategy the
Company has obtained advances from the Federal Home Loan Bank. The Company has pledged
collateral of commercial real estate loans and specific securities to support the
borrowings.
Goodwill
and Other Intangibles Net assets of companies acquired in purchase transactions
are recorded at fair value at the date of acquisition, as such, the historical cost basis of
individual assets and liabilities are adjusted to reflect their fair value. Identified
intangibles are amortized on a straight-line basis over the period benefited. In June 2001,
the Company purchased a bank branch office. The Company recorded core deposit intangibles,
which are being amortized over seven years by the straight-line method. Amortization
expense for the year ended December 31, 2005, 2004 and 2003 was $106,800, $108,800 and
$118,800, respectively. Estimated amortization expense for 2006, 2007, and 2008 is
approximately $107,000 per year. Deposit retention, growth and activities are evaluated for
impairment on an annual basis.
53
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Earnings
Per Share Basic earnings per share (EPS) excludes dilution and is computed
by dividing net income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period plus the dilutive effect
that could occur if the Companys outstanding stock options were exercised and converted
into common stock, net of estimated shares that could be reacquired with proceeds from the
exercise of such options. Stock options are considered to be common stock equivalents. The
following table reconciles the numerator and denominator used in computing both basic
earnings per share and diluted earnings per share for the years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS Calculation |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator (net income) |
|
$ |
6,278,370 |
|
|
$ |
4,977,675 |
|
|
$ |
4,182,676 |
|
Denominator (weighted average common shares
outstanding) |
|
|
8,600,270 |
|
|
|
8,282,588 |
|
|
|
8,033,484 |
|
Basic EPS |
|
$ |
0.73 |
|
|
$ |
0.60 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Calculation |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator (net income) |
|
$ |
6,278,370 |
|
|
$ |
4,977,675 |
|
|
$ |
4,182,676 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
8,600,270 |
|
|
|
8,282,588 |
|
|
|
8,033,484 |
|
Diluted effect of stock options |
|
|
244,356 |
|
|
|
420,023 |
|
|
|
293,424 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common shares
outstanding |
|
|
8,844,626 |
|
|
|
8,702,611 |
|
|
|
8,326,908 |
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
0.71 |
|
|
$ |
0.57 |
|
|
$ |
0.50 |
|
Other Real Estate Owned Real estate acquired by foreclosure, is carried at the lower
of the recorded investment in the property or its fair value less estimated selling costs.
Prior to foreclosure, the value of the underlying loan is written down to the fair value of
the real estate to be acquired, less costs to sell, by a charge to the allowance for loan
losses, if necessary. Fair value of other real estate is generally determined based on an
appraisal of the property. Any subsequent write-downs are charged against noninterest
expenses. Operating expenses of such properties, net of related income, and gains and
losses on their disposition are included in other expenses.
Gain recognition on the disposition of real estate is dependent upon the transaction meeting
certain criteria relating to the nature of the property sold and the terms of the sale. This
includes the buyers initial and continuing investment, the degree of continuing involvement
by the Company with the property after the sale, and other matters. Under certain
circumstances, revenue recognition may be deferred until these criteria are met.
Income Taxes The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using currently enacted tax rates applied
to such taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
54
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Stock
Option Plan The Company accounts for its stock option plan under the
intrinsic value method in accordance with the provisions of Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. As required by the
Statement of Financial Accounting Standards, (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended, by SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure the Company provides pro forma net income and pro forma earnings
per share disclosures for employee stock option grants. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS Statement No. 123, to stock-based employee compensation.
Net income before option expense less compensation expense associated with stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
Net income before option expense less
compensation expense associated with stock options |
|
$ |
6,284,154 |
|
|
$ |
4,981,531 |
|
|
$ |
4,205,080 |
|
|
|
|
(5,784 |
) |
|
|
(3,856 |
) |
|
|
(22,404 |
) |
|
|
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
6,278,370 |
|
|
$ |
4,977,675 |
|
|
$ |
4,182,676 |
|
Deduct: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax |
|
|
(306,870 |
) |
|
|
(149,639 |
) |
|
|
(77,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
5,971,500 |
|
|
$ |
4,828,036 |
|
|
$ |
4,104,873 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.73 |
|
|
$ |
0.60 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.69 |
|
|
$ |
0.58 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.71 |
|
|
$ |
0.57 |
|
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.68 |
|
|
$ |
0.55 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
In 2005, 2004 and 2003 there were no shares that could potentially dilute basic EPS in
the future that were excluded from the calculation of diluted EPS because their effect would
be anti-dilutive. In December 2005 the Executive Compensation Committee of the Board of
Directors approved the accelerated vesting of stock options issued in 2004 to purchase
shares of common stock of Bank of Commerce Holdings. These options were previously awarded
to officers and employees under its 1998 Stock Option Plan. By accelerating the
vesting of these options the Company estimates that approximately $365,000 of future
compensation expense, net of taxes, will be eliminated. Options to purchase 93,000 shares of
the Companys common stock, which would otherwise have vested from time to time over the
next four years, became immediately exercisable as a result of the Executive Compensation
Committees actions. The number of shares and exercise prices of the options subject to
acceleration are unchanged. The remaining terms for each of the options granted remain the
same. The decision to accelerate the vesting of these options, which the Company believes is
in the best interests of its stockholders, was made primarily to reward a key group of
Officers for contributions towards the financial success of the Company. This decision also
reduces non-cash compensation expense that would have been recorded in its income statement
in future periods upon the adoption of Financial Accounting Standards Board Statement No.
123R (Share Based Payment).
55
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Comprehensive
Income Comprehensive income represents net earnings and any revenues,
expenses, gains and losses that, under accounting principles generally accepted in the
United States of America, are excluded from net earnings and recognized directly as a
component of stockholders equity. The Companys only source of other comprehensive income
(loss) is unrealized gains and losses on securities available-for-sale. Reclassification
adjustments result from gains or losses on securities that were realized and included in net
income of the current period that also had been included in other comprehensive income
(loss) as unrealized holding gains or losses in the period in which they arose.
Operating Segments Reportable operating segments are generally defined as components of an
enterprise for which discrete financial information is available, whose operating results
are regularly reviewed by the organizations management and whose revenue is 10 percent or
more of total revenue. Under this definition the Company does not have reportable operating
segments. In the years 2005, 2004 and 2003, the Company accounted for its operations as one
operating segment.
Transfer
of Financial Assets Transfers of financial assets are accounted for as sales,
when control over the assets has been surrendered. Control over transferred assets is deemed
surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase them before
their maturity. The Company services, for others, loans and participation of loans that are
sold of $3,522,609 and $4,550,992 as of December 31, 2005 and 2004, respectively.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 123 (revised 2004) In December 2004 the
FASB revised SFAS No. 123, Accounting for Stock Based Compensation. This statement
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. The Statement establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods and services.
It also addresses transactions in which an entity incurs liabilities in exchange for goods
or services that are based on the fair value of the entitys equity instruments or that may
be settled by the issuance of those equity instruments. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in share-based
payment transactions. This Statement does not change the accounting guidance for share-based
payment transactions with parties other than employees provided in Statement No. 123 as
originally issued and EITF Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
The Statement requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award.
The cost will be recognized over the period during which an employee is required to provide
service in exchange for the award the requisite service period (usually the vesting
period). No compensation cost is recognized for equity instruments for which employees do
not render the requisite service. A public entity will initially measure the cost of
employee services received in exchange for an award of liability instruments based on its
current fair value; the fair value of that award will be remeasured subsequently at each
reporting date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period.
56
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
The grant-date fair value of employee share options and similar instruments will be
estimated using option-pricing models adjusted for the unique characteristics of those
instruments. If an equity award is modified after the grant date, incremental compensation
cost will be recognized in amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the modification.
The notes to financial statements of both public and nonpublic entities will disclose
information to assist users of financial information to understand the nature of share-based
payment transactions and the effects of those transactions on the financial statements.
The Company will adopt this statement on January 1, 2006 using the modified prospective
transition method. The cumulative effect of initially applying this Statement, if any, will
be recognized as of the required effective date. Under the modified prospective transition
method, compensation cost is recognized on or after the required effective date for the
portion of outstanding awards, for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under Statement No. 123 for
either recognition or pro forma disclosures. The Company will adopt the fair value based
method of accounting for stock based employee compensation effective for financial
statements after January 1, 2006.
Management believes that the adoption of this rule will not have a material impact on the
Companys results of operations or financial condition.
On March 30, 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations an Interpretation of FASB Statement No. 143 (FIN 47). FIN 47 was
issued to address diverse accounting practices that developed with respect to the timing of
liability recognition for legal obligations associated with the retirement of a tangible
long-lived asset when the timing and/or method of settlement of the obligation are
conditional on a future event. FIN 47 requires an entity to recognize a liability for the
fair value of a conditional asset retirement obligation when incurred if the liabilitys
fair value can be reasonably estimated. FIN 47 is effective no later than December 31, 2005.
Management believes that the adoption of this rule will not have a material impact on the
Companys results of operations or financial condition.
On May 5, 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections
(FAS 154), replacing APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements. Unless specified in an
accounting standard, FAS 154 requires retrospective application to prior period financial
statements for changes in accounting principle and corrections of errors. APB Opinion 20
previously provided that most changes in accounting principle be recognized by including in
net income the cumulative effect of changing to the new principle in the period of adoption.
Management will adopt the provisions of FAS 154 effective January 1, 2006.
On August 11, 2005, The Financial Accounting Standards Board Issues Revised Exposure Draft
on Accounting for Transfers of Financial Assets The Financial Accounting Standards Board
issued a revised Exposure Draft, Accounting for Transfers of Financial Assets. The proposed
statement seeks to clarify the derecognition requirements for financial assets that were
developed initially in FASB Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and revised in Statement 140, and to
change and simplify the initial measurement of interest related to transferred financial
assets held by a transferor. The proposed changes principally apply to securitizations and
loan participations.
57
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
3. |
|
RESTRICTIONS ON CASH AND DUE FROM BANKS |
During 2004 the Bank implemented a deposit reclassification program which reduced required
average reserve balances at the Federal Reserve Bank to zero. Previously the Bank was
required to maintain average reserve balances with the Federal Reserve Bank. The Bank
maintains compensating balances with its primary correspondent, which totaled $2,500,000 at
December 31, 2005 and 2004.
The amortized cost and estimated fair value of securities available-for-sale are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. Treasury securities and
obligations of U.S. agencies |
|
$ |
43,793,691 |
|
|
$ |
0 |
|
|
$ |
(894,167 |
) |
|
$ |
42,899,524 |
|
Obligations of state and political
subdivisions |
|
|
6,347,437 |
|
|
|
30,213 |
|
|
|
(199,013 |
) |
|
|
6,178,637 |
|
Mortgage-backed securities |
|
|
42,018,403 |
|
|
|
0 |
|
|
|
(1,093,908 |
) |
|
|
40,924,495 |
|
Corporate Bonds |
|
|
4,047,030 |
|
|
|
0 |
|
|
|
(35,659 |
) |
|
|
4,011,371 |
|
|
|
$ |
96,206,561 |
|
|
$ |
30,213 |
|
|
$ |
(2,222,747 |
) |
|
$ |
94,014,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
U.S. Treasury securities and
obligations of U.S. agencies |
|
$ |
34,012,555 |
|
|
$ |
14,897 |
|
|
$ |
(436,410 |
) |
|
$ |
33,591,042 |
|
Obligations of state and political
subdivisions |
|
|
6,517,077 |
|
|
|
59,603 |
|
|
|
(101,592 |
) |
|
|
6,475,088 |
|
Mortgage-backed securities |
|
|
42,478,977 |
|
|
|
41,595 |
|
|
|
(143,509 |
) |
|
|
42,377,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
83,008,609 |
|
|
$ |
116,095 |
|
|
$ |
(681,511 |
) |
|
$ |
82,443,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of securities held-to-maturity at
December 31, 2005 and 2004 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities |
|
$ |
323,773 |
|
|
$ |
38,339 |
|
|
$ |
0 |
|
|
$ |
344,328 |
|
Obligations of state and political
Subdivisions |
|
|
6,608,879 |
|
|
|
77 |
|
|
|
(72,112 |
) |
|
|
6,536,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,932,652 |
|
|
$ |
38,416 |
|
( |
$ |
72,112 |
) |
|
$ |
6,881,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities |
|
$ |
448,753 |
|
|
$ |
38,339 |
|
|
$ |
0 |
|
|
$ |
487,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
The amortized cost and estimated fair value of securities at December 31, 2005 by contractual maturity are shown
below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale |
|
|
Held-to-Maturity |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
7,618,271 |
|
|
$ |
7,540,720 |
|
|
$ |
130,373 |
|
|
$ |
130,239 |
|
Due after one year through five years |
|
|
41,458,212 |
|
|
|
40,648,727 |
|
|
|
1,881,395 |
|
|
|
1,860,489 |
|
Due after five years through ten years |
|
|
20,637,107 |
|
|
|
19,991,730 |
|
|
|
4,597,111 |
|
|
|
4,546,116 |
|
Due after ten years |
|
|
26,492,971 |
|
|
|
25,832,850 |
|
|
|
323,773 |
|
|
|
344,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
96,206,561 |
|
|
$ |
94,014,027 |
|
|
$ |
6,932,652 |
|
|
$ |
6,881,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the current fair value and associated unrealized losses on
investments with unrealized losses at December 31, 2005. The table also discloses whether
these securities have had unrealized losses for less than 12 months or for 12 months or
longer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Treasury
securities and
Obligations of U.
S. Agencies |
|
$ |
27,810,886 |
|
|
($ |
344,747 |
) |
|
$ |
15,982,805 |
|
|
($ |
549,420 |
) |
|
$ |
43,793,691 |
|
|
($ |
894,167 |
) |
Obligations of
state and political
subdivisions |
|
$ |
1,124,037 |
|
|
($ |
22,971 |
) |
|
$ |
4,226,173 |
|
|
($ |
176,041 |
) |
|
$ |
5,350,210 |
|
|
($ |
199,013 |
) |
H-T-M Obligations
of state and
political
subdivisions |
|
$ |
6,608,879 |
|
|
($ |
72,112 |
) |
|
|
0 |
|
|
|
0 |
|
|
$ |
6,608,879 |
|
|
($ |
72,112 |
) |
Mortgage
- backed
securities |
|
$ |
33,439,557 |
|
|
($ |
857,477 |
) |
|
$ |
8,578,846 |
|
|
($ |
236,432 |
) |
|
$ |
42,018,403 |
|
|
($ |
1,093,908 |
) |
Corporate Bonds |
|
$ |
4,047,030 |
|
|
($ |
35,659 |
) |
|
|
0 |
|
|
|
0 |
|
|
$ |
4,047,030 |
|
|
($ |
35,659 |
) |
Total temporarily
impaired securities |
|
$ |
73,030,389 |
|
|
($ |
1,332,966 |
) |
|
$ |
28,787,824 |
|
|
($ |
961,893 |
) |
|
$ |
101,818,213 |
|
|
($ |
2,294,859 |
) |
Economic factors may affect market pricing over the stated maturity of the security.
The unrealized losses associated with securities are not considered to be
other-than-temporary because their unrealized losses are related to changes in interest
rates and do not affect the expected cash flows of the underlying collateral or issuer.
Security income is accrued when earned and included in interest income. The Company requires
a credit rating of A or higher on its initial acquisition of investments and maintains an
average rating of AA on the overall securities portfolio. A total of twenty US Treasury and
Agency securities, nineteen municipal securities and thirteen mortgage-backed securities
have been in an unrealized loss position for greater than 12 months. Management has
evaluated each security in an unrealized loss position to determine if the impairment is
other-than-temporary. Management has determined that no security is other than temporarily
impaired. The unrealized losses are due to interest rate changes and the Company has the
ability and intent to hold all securities with identified impairments to the earlier of the
forecasted recovery or the maturity of the underlying security.
59
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
At December 31, 2005, the Company has pledged book values of $1,000,000 in securities
for treasury, tax and loan accounts, $6,216,000 for deposits of public funds, $22,886,000
for collateralized repurchase agreements, and $20,000,000 for Federal Home Loan borrowings.
Gross realized gains and gross realized losses, respectively, on available-for-sale
securities were $0 and $1,537 in 2005 and $0 and $0 in 2004. Gross unrealized gains and
gross unrealized losses, respectively, on available-for-sale securities were $30,213 and
$2,222,747 in 2005 and $116,095 and $681,511 in 2004. There were no gains or losses
recognized in securities held-to-maturity in 2005, 2004 and 2003.
5. |
|
LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES |
Outstanding loan balances consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Commercial and financial loans |
|
$ |
115,400,728 |
|
|
$ |
105,544,794 |
|
Real estate construction loans |
|
|
105,094,301 |
|
|
|
77,438,755 |
|
Real estate commercial |
|
|
142,992,349 |
|
|
|
135,260,186 |
|
Real estate mortgage |
|
|
3,669,353 |
|
|
|
4,423,104 |
|
Installment loans |
|
|
439,044 |
|
|
|
300,337 |
|
Other |
|
|
446,170 |
|
|
|
352,879 |
|
|
|
|
|
|
|
|
|
|
|
368,041,945 |
|
|
|
323,320,055 |
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
Deferred loan fees, net |
|
|
420,405 |
|
|
|
652,970 |
|
Allowance for loan and lease losses |
|
|
4,316,379 |
|
|
|
3,866,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
363,305,161 |
|
|
$ |
318,800,587 |
|
|
|
|
|
|
|
|
Included in total loans are nonaccrual loans of $372,479 and $2,382,886 at December 31, 2005
and 2004, respectively. If interest on nonaccrual loans at December 31, 2005 and 2004 had
been accrued, such interest income would be $547 and $146,276 during the years ended
December 31, 2005 and 2004, respectively. A loan is impaired when, based on current
information and events, management believes it is probable that the Bank will not be able to
collect all amounts due according to the contractual terms of the loan agreement. The Bank
had outstanding balances of $328,067 and $3,214,492 in impaired loans that had impairment
allowances of $291,723 and $869,590 as of December 31, 2005 and 2004, respectively.
The average outstanding balances of impaired loans were $1,748,956, $3,601,274 and
$2,235,293, for the years ended December 31, 2005, 2004 and 2003 respectively. There was
interest of $20,000, $0 and $0 recognized on impaired loans during the year ended December
31, 2005, 2004 and 2003, respectively.
The Company concentrates its lending activities primarily within Shasta, El Dorado, Placer
Sacramento, Sutter and Tehama counties, in California, and the location of the four full
service offices of the Bank. Although the Company has a diversified loan portfolio, a
significant portion of its customers ability to repay the loans is dependent upon the
professional services and residential real estate development industry sectors. Generally,
the loans are secured by real estate or other assets and are expected to be repaid from cash
flows of the borrower or proceeds from the sale of the collateral.
60
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
The Companys exposure to credit loss, if any, is the difference between the fair value of the
collateral, and the outstanding balance of the loan. At December 31, 2005 and 2004, the Company had
pledged $44,251,812 and $44,982,725, respectively, in loans as available collateral for Federal
Home Loan Bank borrowings. In the ordinary course of business, the Company enters various
types of transactions, which involve financial instruments with off-balance sheet risk. These
instruments include commitments to extend credit and stand-by letters of credit, which are not
reflected in the consolidated balance sheets. These transactions may involve, to varying degrees,
credit and interest rate risk more than the amount, if any recognized in the consolidated balance
sheets. Commitments to extend credit and standby letters of credit bear similar credit risk
characteristics as outstanding loans. An allowance for unfunded loan commitments and letters of
credit is determined using estimates of the probability of funding. This reserve is carried as a
liability on the consolidated balance sheet.
Changes in the allowance for loan losses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Balance at beginning of year |
|
$ |
3,866,498 |
|
|
$ |
3,675,084 |
|
|
$ |
3,528,968 |
|
Provision for loan losses |
|
|
447,700 |
|
|
|
554,000 |
|
|
|
515,000 |
|
Loans charged off |
|
|
(92,958 |
) |
|
|
(368,300 |
) |
|
|
(379,717 |
) |
Recoveries of loans previously charged off |
|
|
95,139 |
|
|
|
5,714 |
|
|
|
10,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
4,316,379 |
|
|
$ |
3,866,498 |
|
|
$ |
3,675,084 |
|
|
|
|
|
|
|
|
|
|
|
6. |
|
BANK PREMISES AND EQUIPMENT |
Bank premises and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
December 31, |
|
|
|
Lives |
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
|
|
$ |
1,507,628 |
|
|
$ |
1,507,628 |
|
Bank buildings |
|
31.5 years |
|
|
4,134,364 |
|
|
|
3,723,075 |
|
Furniture, fixtures and equipment |
|
3 - 7 years |
|
|
4,187,004 |
|
|
|
5,255,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,828,996 |
|
|
|
10,485,960 |
|
Less accumulated depreciation |
|
|
|
|
(4,619,257 |
) |
|
|
(5,056,342 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,209,739 |
|
|
|
5,429,618 |
|
Construction in progress |
|
|
|
|
420,945 |
|
|
|
54,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,630,684 |
|
|
$ |
5,484,196 |
|
|
|
|
|
|
|
|
|
|
Depreciation expense, included in net occupancy and equipment expense, is $564,779,
$610,997, and $691,859 for the years ended December 31, 2005, 2004 and 2003, respectively.
61
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Cash surrender value of bank owned life insurance
policies |
|
$ |
4,977,147 |
|
|
$ |
4,810,851 |
|
Deferred tax asset, net |
|
|
3,752,268 |
|
|
|
2,683,763 |
|
Accrued interest on loans |
|
|
1,794,294 |
|
|
|
1,495,967 |
|
Accrued interest on investment securities |
|
|
748,225 |
|
|
|
474,451 |
|
Goldman Sachs Sweep account receivable |
|
|
18,339 |
|
|
|
176,172 |
|
Federal Home Loan Bank Stock |
|
|
2,585,000 |
|
|
|
1,678,300 |
|
Core Deposit Intangible, net of accumulated
amortization of $508,136 and $401,336 |
|
|
261,009 |
|
|
|
367,809 |
|
Investment in junior subordinated debt payable to
subsidiary grantor trust |
|
|
310,000 |
|
|
|
0 |
|
Other |
|
|
758,952 |
|
|
|
439,814 |
|
|
|
|
|
|
|
|
|
|
$ |
15,205,234 |
|
|
$ |
12,127,127 |
|
|
|
|
|
|
|
|
Time certificates of deposit of $100,000 or more totaled $95,901,445 and $83,514,897 at
December 31, 2005 and 2004, respectively. Interest expense on such deposits was $2,813,533,
$1,760,780 and $1,937,164 during 2005, 2004 and 2003, respectively. At December 31,
2005, the scheduled maturities for all time deposits are as follows:
Time Deposit Maturity Schedule
|
|
|
|
|
2006 |
|
$ |
138,789,023 |
|
2007 |
|
|
9,090,610 |
|
2008 |
|
|
980,157 |
|
2009 |
|
|
396,449 |
|
2010 |
|
|
0 |
|
Thereafter |
|
|
0 |
|
|
|
|
|
Total |
|
$ |
149,256,239 |
|
Other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
$ |
3,500,969 |
|
|
$ |
3,161,765 |
|
Employee incentive payable |
|
|
656,356 |
|
|
|
518,852 |
|
Accrued 401(k) match payable |
|
|
36,729 |
|
|
|
35,000 |
|
Accrued interest payable |
|
|
388,229 |
|
|
|
228,934 |
|
Reserve for off-balance sheet commitments |
|
|
391,876 |
|
|
|
302,876 |
|
Investment purchase payable |
|
|
0 |
|
|
|
3,320,384 |
|
Taxes payable |
|
|
206,641 |
|
|
|
572,623 |
|
Dividend payable |
|
|
692,632 |
|
|
|
0 |
|
Goldman Sachs Sweep account payable |
|
|
784,031 |
|
|
|
0 |
|
Other |
|
|
536,852 |
|
|
|
239,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,194,315 |
|
|
$ |
8,379,475 |
|
|
|
|
|
|
|
|
62
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
10. |
|
FEDERAL HOME LOAN BANK ADVANCES |
Included in other borrowings are advances from the Federal Home Loan Bank of San Francisco
(FHLB) totaling $55,000,000 as of December 31, 2005 and $35,000,000 as of December 31,
2004. The FHLB advances bear fixed and floating rates of interest ranging from 4.33% to
4.43%. Interest is payable quarterly. FHLB advances due as follows: $5,000,000 maturing
January 27, 2006 at 4.33%, $15,000,000 maturing October 31, 2006 at 4.36%, $10,000,000
maturing November 27, 2006 at 4.39%, $15,000,000 maturing November 30, 2007 and $10,000,000
maturing on January 24, 2008 at 4.43%. These borrowings are secured by an investment in FHLB
stock and certain real estate mortgage loans which have been specifically pledged to the FHLB
pursuant to their collateral requirements. Based upon the level of FHLB advances, the Company
was required to hold a minimum investment in FHLB stock of $2,585,000 at December 31, 2005
and to pledge $44,251,812 and $44,982,725 of its real estate mortgage loans to the FHLB as
collateral as of December 31, 2005 and 2004. At December 31, 2005 the Bank had available
borrowing lines at the FHLB of $62,017,750 and additional federal fund borrowing lines at two
correspondent banks totaling $15,000,000.
11. |
|
JUNIOR SUBORDINATED DEBT PAYABLE TO UNCONSOLIDATED SUBSIDIARY GRANTOR TRUST |
During the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware
statutory business trust, Bank of Commerce Holdings Trust (the grantor trust), which issued
$5.0 million of guaranteed preferred beneficial interests in Bank of Commerce Holdings
junior subordinated debentures (the trust notes) to the public and $155,000 common
securities to the Company. These debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. The proceeds from the issuance of the trust notes were transferred from the
grantor trust to the Holding Company and from the Holding Company to the Bank as surplus
capital. The trust notes accrue and pay distributions on a quarterly basis at 3 month London
Interbank Offered Rate (LIBOR) plus 3.30%. The rate at December 31, 2005 was 7.45%. The
rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The final maturity
on the trust notes is March 18, 2033, and the debt allows for prepayment after five years on
the quarterly payment date.
On July 29, 2005, Bank of Commerce Holdings (the Company) participated in a private
placement to an institutional investor of $10 million of fixed rate trust preferred
securities (the Trust Preferred Securities); through a newly formed Delaware trust
affiliate, Bank of Commerce Holdings Trust II (the Trust). The Trust Preferred Securities
mature on September 15, 2035, and are redeemable at the Companys option on any March 15,
June 15, September 15 or December 15 on or after September 15, 2010. In addition, the Trust
Preferred Securities require quarterly distributions by the Trust to the holder of the Trust
Preferred Securities at a rate of 6.115%, until September 10, 2010 after which the rate will
reset quarterly to equal LIBOR plus 1.58%. The Trust simultaneously issued $310,000 of the
Trusts common securities of beneficial interest to the Company.
The proceeds from the sale of the Trust Preferred Securities were used by the Trust to
purchase from the Company the aggregate principal amount of $10,310,000 of the Companys
floating rate junior subordinate notes (the Notes). The net proceeds to the Company from
the sale of the Notes to the Trust will be used by the Company for general corporate
purposes, including funding the growth of the Companys various financial services.
63
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
The Notes were issued pursuant to a Junior Subordinated Indenture (the Indenture),
dated July 29, 2005, by and between the Company and J.P. Morgan Chase Bank, National
Association, as trustee. Like the Trust Preferred Securities, the Notes bear interest at a
floating rate, at 6.115% until September 10, 2010, after which the rate will reset on a
quarterly basis to equal LIBOR plus 1.58%. The interest payments by the Company will be
used to pay the quarterly distributions payable by the Trust to the holder of the Trust
Preferred Securities. However, so long as no event of default, as described below, has
occurred under the Notes, the Company may, at any time and from time to time, defer interest
payments on the Notes (in which case the Trust will be entitled to defer distributions
otherwise due on the Trust Preferred Securities) for up to twenty (20) consecutive quarters.
The Notes are subordinated to the prior payment of other indebtedness of the Company that,
by its terms, is not similarly subordinated. Although the Notes will be recorded as a long
term liability on the Companys balance sheet, for regulatory purposes, the Notes are
expected to be treated as Tier 1 or Tier 2 capital under rulings of the Federal Reserve
Board, the Companys primary federal regulatory agency.
The Notes mature on September 15, 2035, but may be redeemed at the Companys option at any
time on or after September 15, 2010 or at any time upon certain events, such as a change in
the regulatory capital treatment of the Notes, the Trust being deemed to be an investment
company or the occurrence of certain adverse tax events. In each case, the Company may
redeem the Notes for their aggregate principal amount, plus accrued interest, if any.
Provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
3,396,316 |
|
|
$ |
2,571,071 |
|
|
$ |
2,171,432 |
|
State |
|
|
888,915 |
|
|
|
674,392 |
|
|
|
568,351 |
|
|
|
|
|
|
|
|
|
|
|
Total currently payable |
|
|
4,285,231 |
|
|
|
3,245,463 |
|
|
|
2,739,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(333,092 |
) |
|
|
(224,682 |
) |
|
|
(153,895 |
) |
State |
|
|
(65,635 |
) |
|
|
(89,873 |
) |
|
|
(99,230 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred provision |
|
|
(398,727 |
) |
|
|
(314,555 |
) |
|
|
(253,125 |
) |
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
|
$ |
3,886,504 |
|
|
$ |
2,930,908 |
|
|
$ |
2,486,658 |
|
|
|
|
|
|
|
|
|
|
|
64
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
Income tax expense attributable to income before income taxes differed from the amounts
computed by applying the U.S. federal income tax rate of 34 percent to income before income
taxes because of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Pretax Income |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax at the Federal statutory rate |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
State franchise tax, net of Federal tax benefit |
|
|
5.35 |
|
|
|
4.85 |
|
|
|
4.64 |
|
Tax-exempt interest |
|
|
(1.01 |
) |
|
|
(0.91 |
) |
|
|
(0.67 |
) |
Other |
|
|
(0.11 |
) |
|
|
(0.88 |
) |
|
|
(0.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.23 |
% |
|
|
37.06 |
% |
|
|
37.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2005 and 2004 consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
State franchise taxes |
|
$ |
280,605 |
|
|
$ |
174,456 |
|
Deferred compensation |
|
|
1,569,835 |
|
|
|
1,417,735 |
|
Loan loss reserves |
|
|
1,673,718 |
|
|
|
1,475,084 |
|
Net unrealized losses on securities available-for-sale |
|
|
902,447 |
|
|
|
232,669 |
|
Other |
|
|
235,839 |
|
|
|
227,384 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
4,662,444 |
|
|
|
3,527,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(300,845 |
) |
|
|
(318,439 |
) |
Deferred loan origination costs |
|
|
(395,547 |
) |
|
|
(333,658 |
) |
Deferred state taxes |
|
|
(213,784 |
) |
|
|
(191,468 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(910,176 |
) |
|
|
(843,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
3,752,268 |
|
|
$ |
2,683,763 |
|
|
|
|
|
|
|
|
|
|
On February 17, 1998, the Board of Directors adopted the 1998 Stock Option Plan (the Plan)
which was approved by the Companys stockholders on April 21, 1998. The Plan provides for
awards in the form of options, which may constitute incentive stock options (Incentive
Options) under Section 422(a) of the Internal Revenue Code of 1986, as amended (the
Code), or non-statutory stock options (NSOs) to key personnel of the Company, including
directors. The Plan provides that Incentive Options under the Plan may not be granted at
less than 100% of fair market value of the Companys common stock on the date of the grant.
NSOs may not be granted at less than 85% of the fair market value of the common stock on the
date of the grant. The purpose of the plan is to promote the long-term success of the
Company and the creation of stockholder value by (a) encouraging key personnel to focus on
critical long range objectives, (b) increasing the ability of the Company to attract and
retain key personnel and (c) linking key personnel directly to stockholder interests through
increased stock ownership. |
65
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
A total of 1,782,000 shares of the Companys common stock are reserved for grant under
the Plan. |
|
|
The Plan provides that all options under the Plan shall vest at a rate of at least 20% per
year from the date of the grant. Vesting may be accelerated in case of an optionees death,
disability, and retirement or in case of a change of control. |
|
|
The following table presents the changes in outstanding stock options for the periods
indicated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Options outstanding, December 31, 2002 |
|
|
1,237,332 |
|
|
$ |
3.53 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
13,500 |
|
|
$ |
6.75 |
|
Exercised |
|
|
(205,566 |
) |
|
$ |
3.03 |
|
Forfeited |
|
|
(10,470 |
) |
|
$ |
5.76 |
|
Options outstanding, December 31, 2003 |
|
|
1,034,796 |
|
|
$ |
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
111,000 |
|
|
$ |
10.63 |
|
Exercised |
|
|
(372,665 |
) |
|
$ |
3.15 |
|
Forfeited |
|
|
( 7,200 |
) |
|
$ |
5.89 |
|
Options outstanding, December 31, 2004 |
|
|
765,931 |
|
|
$ |
4.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
6,000 |
|
|
$ |
10.90 |
|
Exercised |
|
|
(155,065 |
) |
|
$ |
3.02 |
|
Forfeited |
|
|
(8,550 |
) |
|
$ |
9.66 |
|
Options outstanding, December 31, 2005 |
|
|
608,316 |
|
|
$ |
5.20 |
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, 124,740 shares were available for future grants under the Plan. As of
December 31, 2005, 2004 and 2003, respectively, 539,314, 572,488 and 916,536 shares
respectively were available to be exercised. The weighted average option cost for
December 31, 2005, 2004 and 2003, respectively, was $4.11, $7.74 and $14.31, respectively. |
|
|
The Company uses the intrinsic value based method for measuring compensation cost related to
the Plan. Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date over the amount an employee or
director must pay to acquire the stock. This cost is amortized on a straight-line basis
over the vesting period of the options granted. Compensation cost related to the discount
on non-qualified options as of December 31, 2005, 2004 and 2003 was $5,784, $3,856 and
$22,404 respectively. |
66
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Additional information regarding options outstanding as of December 31, 2005 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
Exercise |
|
|
|
|
|
Remaining Contractual |
|
|
|
|
Prices |
|
Options Outstanding |
|
Life (Years) |
|
Options Exercisable |
|
|
|
$ |
2.75 |
|
|
|
269,600 |
|
|
|
2.3 |
|
|
|
269,600 |
|
|
|
$ |
3.23 |
|
|
|
69,836 |
|
|
|
2.3 |
|
|
|
69,836 |
|
|
|
$ |
5.42 |
|
|
|
29,250 |
|
|
|
5.4 |
|
|
|
23,400 |
|
|
|
$ |
6.67 |
|
|
|
63,000 |
|
|
|
5.6 |
|
|
|
50,400 |
|
|
|
$ |
7.30 |
|
|
|
55,130 |
|
|
|
6.5 |
|
|
|
33,078 |
|
|
|
$ |
6.75 |
|
|
|
13,500 |
|
|
|
7.0 |
|
|
|
5,400 |
|
|
|
$ |
10.72 |
|
|
|
7,500 |
|
|
|
8.4 |
|
|
|
7,500 |
|
|
|
$ |
10.60 |
|
|
|
73,500 |
|
|
|
8.5 |
|
|
|
73,500 |
|
|
|
$ |
10.76 |
|
|
|
3,000 |
|
|
|
8.9 |
|
|
|
3,000 |
|
|
|
$ |
9.11 |
|
|
|
18,000 |
|
|
|
8.3 |
|
|
|
3,600 |
|
|
|
$ |
11.59 |
|
|
|
3,500 |
|
|
|
9.4 |
|
|
|
0 |
|
|
|
$ |
10.20 |
|
|
|
2,500 |
|
|
|
9.4 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
608,316 |
|
|
|
|
|
|
|
539,314 |
|
|
|
The fair value of the options granted during 2005, 2004 and 2003, is estimated as $20,068,
$364,769 and $28,142, respectively, on the date of grant using a binomial option-pricing
model with the following assumptions: volatility of 32.36%, 30.88% and 22.75%, respectively,
risk-free interest rate of 3.92%, 3.62% and 3.27%, respectively, expected dividends of $0.24
per share per year for 2005 and $0.23 per share in 2004, annual dividend rate of 2.49%,
2.00% and 3.55%, assumed forfeiture rate of zero and an expected life of seven years. |
|
|
There were 6,000 options granted in 2005, 111,000 options granted in 2004 and 13,500 options
granted in 2003. The fair value per share of the 2005, 2004 and 2003 awards was $3.34, $3.29
and $2.22, respectively. |
|
|
On August 24, 2001, the Board of Directors authorized a common stock repurchase of up
to 5%, or approximately 425,000 shares, of the Companys common stock on an annual basis for
the next seven years. The number of shares is adjusted on an annual basis to coincide with
new issues and forfeitures. No shares were repurchased during 2005, 2004 or 2003. Shares
purchased are retired by a charge to common stock and retained earnings for the cost. To
date, the Company has repurchased 1,423,311 shares at an average price of $6.84. |
|
|
The Company paid a quarterly cash dividend of $0.06, $0.06 and $0.06 on April 8, 2005, July
8, 2005 and October 7, 2005, respectively, to stockholders of record as of March 31, 2005,
June 30, 2005 and September 30, 2005, respectively. The fourth quarter dividend of $0.08 per
share is payable to shareholders of record as of December 31, 2005 to be paid on January 6,
2006.
|
|
|
|
On October 22, 2004 and 2003, a cash dividend of $0.23 and $0.22 per share, respectively,
was paid to shareholders of record as of October 1, 2004 and 2003. On April 20, 1999, the
Board of Directors authorized 2,000,000 shares of preferred stock. As of December 31, 2004,
no preferred shares had been issued. |
67
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
15. |
|
RETIREMENT BENEFITS |
|
|
|
Profit Sharing Plan In 1985, the Company adopted a profit sharing 401(k) plan for eligible
employees to be funded out of the earnings of the Company. The employees contributions are
limited to the maximum amount allowable under IRS Section 402(G). The Companys
contributions include a matching contribution of 100% of the first 3% of salary deferred and
50% of the next 2% of salary deferred. Discretionary contributions are also permitted. The
Company made matching contributions aggregating $157,000, $134,570 and $120,000 for the
years ended December 31, 2005, 2004 and 2003, respectively. No discretionary contributions
were made in 2005, 2004 or 2003. |
|
|
|
Salary Continuation Plan In April 2002, the Board of Directors approved the
implementation of the Executive Salary Continuation Plan (SCP), which is a non-qualified
executive benefit plan in which the Bank agrees to pay the executives covered by the SCP
plan additional benefits in the future in return for continued satisfactory performance by
the executives. Benefits under the salary continuation plan include a benefit generally
payable commencing upon a designated retirement date for a fixed period of twenty years;
disability or termination of employment, and a death benefit for the participants designated
beneficiaries. Key-man life insurance policies were purchased as an investment to provide
for the Banks contractual obligation to pay pre-retirement death benefits and to recover
the Banks cost of providing benefits. The executive is the insured under the policy, while
the Bank is the owner and beneficiary. The assets of the SCP, under Internal Revenue Service
Regulations, are the property of the Company and are available to the Companys general
creditors. The insured executive has no claim on the insurance policy, its cash value or the
proceeds thereof. |
|
|
|
The retirement benefit is derived from accruals to a benefit account during the
participants employment. At the end of the executives period of service, the aggregate
amount accrued should equal the then present value of the benefits expected to be paid to
the executive. Accrued compensation expense under the salary continuation plan totaled
$124,356 and $104,376 for 2005 and 2004, respectively. As of December 31, 2005 and 2004, the
vested benefit payable was $488,085 and $339,099, respectively. |
|
|
|
Directors deferred fee compensation Effective January 1, 1993, the Board of Directors
approved the implementation of the Directors Deferred Compensation Plan, which is a
non-qualified plan in which a Director may elect to defer the payment of all or any part of
the fee compensation to which such director would otherwise be entitled to as directors
fees or committee fees to be payable upon retirement of the director in a lump sum
distribution or over a period not to exceed fifteen years. Interest on Directors deferred
compensation is fixed at 10% per the plan. Deferred compensation expense totaled $321,320
and $280,671 at December 31, 2005 and 2004, respectively. As of December 31, 2005 and 2004,
the vested benefit payable was $1,818,017 and $1,571,260, respectively. |
|
16. |
|
RELATED PARTY TRANSACTIONS |
|
|
|
Some of the directors, officers and principal stockholders of the Company and their
associates were customers of and had banking transactions with the Bank in the ordinary
course of the Banks business during 2005 and the Bank expects to have such transactions in
the future. All deposits, loans and commitments to loans included in such transactions were
made in compliance with the applicable laws on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions
with other persons of similar creditworthiness, and in the opinion of the Company, did not
involve more than a normal risk of collectibility or present other unfavorable features. |
68
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
An analysis of the activity in related party loans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Balance at beginning of year |
|
$ |
3,622,750 |
|
|
$ |
4,123,712 |
|
New loan additions |
|
|
11,318 |
|
|
|
541,097 |
|
Principal repayments |
|
|
(1,779,317 |
) |
|
|
(1,042,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
1,854,751 |
|
|
$ |
3,622,750 |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 and 2004 there were no related party loans, which were past due or
classified. At December 31, 2005 there was approximately $380,000 available in commitments to
related party loans. |
17. |
|
COMMITMENTS AND CONTINGENCIES |
|
|
Lease Commitments The Company leases certain facilities where it conducts its operations.
Future minimum lease commitments under all non-cancelable operating leases as of December
31, 2005 are below: |
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
2006 |
|
$ |
479 |
|
2007 |
|
$ |
513 |
|
2008 |
|
$ |
550 |
|
2009 |
|
$ |
590 |
|
2010 |
|
$ |
436 |
|
Thereafter |
|
$ |
572 |
|
|
|
|
|
Total |
|
$ |
3,140 |
|
|
|
|
|
|
|
Rental expense for the years ended December 31, 2005, 2004 and 2003 was $466,061,
$424,205 and $449,818, respectively. |
|
|
Off-Balance Sheet Financial Instruments In the ordinary course of business, the Company
enters various types of transactions, which involve financial instruments with off-balance
sheet risk. These instruments include commitments to extend credit and standby letter of
credits, which are not reflected in the accompanying consolidated balance sheets. These
transactions may involve, to varying degrees, credit and interest rate risk more than the
amount, if any recognized in the consolidated balance sheets. |
69
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
The off-balance sheet credit risk exposure of the Company is the contractual amount of
commitments to extend credit and stand-by letters of credit. The Company applies the same
credit standards to these contracts as it uses for loans recorded on the balance sheet. |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Off-balance sheet commitments: |
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
159,485,594 |
|
|
$ |
128,837,320 |
|
Standby letters of credit |
|
|
9,771,080 |
|
|
|
7,064,798 |
|
|
|
Commitments to extend credit are agreements to lend to customers. These commitments have
specified interest rates and generally have fixed expiration dates but may be terminated by
the Company if certain conditions of the contract are violated. Although currently subject
to draw down, many of the commitments do not necessarily represent future cash requirements.
Collateral held relating to these commitments varies, but generally includes real estate,
securities and cash. |
|
|
Standby letters of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Credit risk arises in these transactions from
the possibility that a customer may not be able to repay the Bank upon default of
performance. Collateral held for standby letters of credit is based on an individual
evaluation of each customers creditworthiness, but may include cash and securities. |
|
|
Commitments to extend credit and standby letters of credit bear similar credit risk
characteristics as outstanding loans. |
|
|
Litigation The Company is subject to various pending and threatened legal actions arising
in the ordinary course of business. The Company maintains reserves for losses from legal
actions that are both probable and estimable. In the opinion of management the disposition
of claims currently pending will not have a material effect on the Companys consolidated
financial position or results of operations. |
|
|
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary
actions by regulators that if undertaken, could have a direct material effect on the
Companys and Consolidated Financial Statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. |
|
|
The capital amounts and the Banks prompt corrective action classifications are also
subject to qualitative judgments by the regulators about components, risk weightings and
other factors. Prompt corrective action provisions are not applicable to Bank Holding
Companies. Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets and of Tier 1 capital to average assets. Management believes as of
December 31, 2005 that the Company and the Bank met all capital adequacy requirements to
which they are subject. |
70
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
As of December 31, 2005, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, an institution must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are
no conditions or events since that notification that management believes have changed the
Banks category. The Companys and the Banks actual capital amounts and ratios as of
December 31, 2005 and 2004 are also presented in the table. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Categorized as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well Capitalized |
|
|
|
|
|
|
|
|
|
|
For Capital |
|
Under Prompt |
|
|
Actual |
|
Adequacy Purposes |
|
Corrective Action |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
At December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital (to average assets) |
|
$ |
50,427,990 |
|
|
|
10.19 |
% |
|
$ |
19,800,000 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
Tier 1 capital (to risk-weighted assets) |
|
|
50,427,990 |
|
|
|
12.05 |
% |
|
|
16,734,380 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
Total capital (to risk-weighted assets) |
|
|
54,744,369 |
|
|
|
13.09 |
% |
|
|
33,468,760 |
|
|
|
8.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital (to average assets) |
|
$ |
50,530,699 |
|
|
|
10.22 |
% |
|
$ |
19,783,694 |
|
|
|
4.00 |
% |
|
$ |
24,729,617 |
|
|
|
5.00 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
50,530,699 |
|
|
|
12.08 |
% |
|
|
16,734,380 |
|
|
|
4.00 |
% |
|
|
25,101,570 |
|
|
|
6.00 |
% |
Total capital (to risk-weighted assets) |
|
|
54,841,378 |
|
|
|
13.11 |
% |
|
|
33,468,760 |
|
|
|
8.00 |
% |
|
|
41,835,950 |
|
|
|
10.00 |
% |
|
At December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital (to average assets) |
|
$ |
40,616,084 |
|
|
|
9.27 |
% |
|
$ |
13,680,000 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
Tier 1 capital (to risk-weighted assets) |
|
|
40,616,084 |
|
|
|
11.34 |
% |
|
|
11,818,412 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
Total capital (to risk-weighted assets) |
|
|
44,482,582 |
|
|
|
12.42 |
% |
|
|
23,636,824 |
|
|
|
8.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital (to average assets) |
|
$ |
38,684,893 |
|
|
|
8.91 |
% |
|
$ |
15,575,720 |
|
|
|
4.00 |
% |
|
$ |
19,650,000 |
|
|
|
5.00 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
38,684,893 |
|
|
|
10.80 |
% |
|
|
12,792,094 |
|
|
|
4.00 |
% |
|
|
19,188,141 |
|
|
|
6.00 |
% |
Total capital (to risk-weighted assets) |
|
|
42,551,391 |
|
|
|
11.88 |
% |
|
|
25,584,187 |
|
|
|
8.00 |
% |
|
|
31,980,234 |
|
|
|
10.00 |
% |
|
|
The principal sources of cash for the Holding Company are dividends from the Bank.
Dividends from the Bank to the Holding Company are restricted under California law to the
lesser of the Banks retained earnings or the Banks net income for the latest three fiscal
years, less dividends previously declared during that period, or, with the approval of
California Superintendent of Banks, to the greater of the retained earnings of the Bank, the
net income of the Bank for its last fiscal year, or the net income of the Bank for its
current fiscal year. As of December 31, 2005, the maximum amount available for dividend
distribution under this restriction was approximately $9,479,551. |
|
|
The Bank is subject to certain restrictions under the Federal Reserve Act, including
restrictions on the extension of credit to affiliates. In particular, it is prohibited from
lending to an affiliated company unless the loans are secured by specific types of
collateral. Such secured loans and other advances from the subsidiaries are limited to 10
percent of the subsidiarys equity. No such loans or advances were outstanding during 2005
or 2004. |
71
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
19. |
|
FAIR VALUES OF FINANCIAL INSTRUMENTS |
|
|
The following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments: |
|
|
Cash and cash equivalents The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents are a reasonable estimate of fair value. |
|
|
Securities Fair values for securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted market prices of
comparable instruments. Securities available-for-sale are carried at their aggregate fair
value, while securities held-to-maturity are carried at amortized cost. |
|
|
Loans receivable For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values for fixed
rate loans are estimated using discounted cash flow analysis, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest receivable approximates its fair value. |
|
|
Commitments to extend credit and standby letters of credit
The fair value of commitments
is the off-balance sheet amount of loan commitments and outstanding letters of credit. |
|
|
Federal Home Loan Bank borrowings The fair value of borrowed funds with
maturities less than one year is based on carrying amounts. |
|
|
Junior subordinated debt payable to unconsolidated
subsidiary grantor trust The fair value
of variable rate junior subordinated debt payable to subsidiary grantor trust is based on
carrying amounts. |
|
|
Deposit liabilities The fair values disclosed for demand deposits (e.g., interest and
noninterest checking, passbook savings, and money market accounts) are, by definition, equal
to the amount payable on demand at the reporting date (i.e., their carrying amounts). The
fair values for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits. The carrying amount of
accrued interest payable approximates its fair value. |
|
|
Securities purchased under agreements to resell
The fair value of securities purchased
under agreements to resell is estimated by discounting the contractual cash flows under
outstanding borrowings at rates prevailing in the marketplace today for similar borrowings,
rates and collateral. |
72
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
Limitations Fair value estimates are made at a specific point in time, based on
relevant market information and other information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering for sale at
one time the Companys entire holdings of a particular financial instrument. |
|
|
Because no market exists for a significant portion of the Companys financial instruments,
fair value estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial instruments, and
other factors. |
|
|
These estimates are subjective in nature, involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. |
|
|
Fair value estimates are based on current on and off-balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or liabilities include
deferred tax assets and liabilities, and property, plant and equipment. In addition, the
tax ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any of the
estimates. |
|
|
The estimated fair values of the Companys financial instruments are approximately as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
Contract |
|
Carrying |
|
Fair |
|
|
Amount |
|
Amount |
|
Value |
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
$ |
26,555,887 |
|
|
$ |
26,555,887 |
|
Securities |
|
|
|
|
|
|
100,946,679 |
|
|
|
100,895,199 |
|
Loans, net |
|
|
|
|
|
|
363,305,161 |
|
|
|
361,486,951 |
|
Accrued interest on loans |
|
|
|
|
|
|
1,794,294 |
|
|
|
1,794,294 |
|
Accrued interest on securities |
|
|
|
|
|
|
748,225 |
|
|
|
748,225 |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand and savings |
|
|
|
|
|
$ |
222,859,530 |
|
|
$ |
222,859,530 |
|
Fixed rate certificates |
|
|
|
|
|
|
120,699,610 |
|
|
|
120,659,339 |
|
Variable certificates |
|
|
|
|
|
|
28,556,629 |
|
|
|
28,556,629 |
|
Accrued interest payable |
|
|
|
|
|
|
388,229 |
|
|
|
388,229 |
|
Securities sold under agreements to repurchase |
|
|
|
|
|
|
22,885,658 |
|
|
|
22,885,658 |
|
Federal Home Loan Borrowings |
|
|
|
|
|
|
55,000,000 |
|
|
|
54,999,419 |
|
Junior subordinated debt payable to unconsolidated
subsidiary grantor trust |
|
|
|
|
|
|
15,310,000 |
|
|
|
15,310,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off balance sheet financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
159,485,594 |
|
|
|
|
|
|
$ |
159,485,594 |
|
Standby letters of credit |
|
|
9,771,080 |
|
|
|
|
|
|
|
9,771,080 |
|
73
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
|
Contract |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Amount |
|
|
Value |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
$ |
19,240,951 |
|
|
$ |
19,240,951 |
|
Securities |
|
|
|
|
|
|
82,891,946 |
|
|
|
82,930,285 |
|
Loans, net |
|
|
|
|
|
|
318,800,587 |
|
|
|
318,555,822 |
|
Accrued interest on loans |
|
|
|
|
|
|
1,495,967 |
|
|
|
1,495,967 |
|
Accrued interest on securities |
|
|
|
|
|
|
474,450 |
|
|
|
474,450 |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand and savings |
|
|
|
|
|
$ |
214,378,444 |
|
|
$ |
214,378,444 |
|
Fixed rate certificates |
|
|
|
|
|
|
131,311,824 |
|
|
|
131,291,349 |
|
Variable certificates |
|
|
|
|
|
|
7,188,015 |
|
|
|
7,188,015 |
|
Accrued interest payable |
|
|
|
|
|
|
228,934 |
|
|
|
228,934 |
|
Securities sold under agreements to repurchase |
|
|
|
|
|
|
2,003,712 |
|
|
|
2,033,712 |
|
Federal Home Loan Borrowings |
|
|
|
|
|
|
35,000,000 |
|
|
|
35,000,000 |
|
Junior subordinated debt payable to unconsolidated
subsidiary grantor trust |
|
|
|
|
|
|
5,000,000 |
|
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off balance sheet financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
128,837,320 |
|
|
|
|
|
|
$ |
128,837,320 |
|
Standby letters of credit |
|
|
7,064,798 |
|
|
|
|
|
|
|
7,064,798 |
|
74
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
20. |
|
BANK OF COMMERCE HOLDINGS (PARENT COMPANY ONLY)
FINANCIAL INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Condensed Balance Sheets |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
361,485 |
|
|
$ |
613,049 |
|
Time deposit with subsidiary |
|
|
2,532,885 |
|
|
|
550,000 |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
2,894,370 |
|
|
|
1,163,049 |
|
|
|
|
|
|
|
|
|
|
Participation loans, net of allowance
for loan and lease losses of $5,700 |
|
|
2,009,036 |
|
|
|
0 |
|
Investment in subsidiaries |
|
|
50,260,520 |
|
|
|
39,093,279 |
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
67,500 |
|
|
|
97,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
55,231,426 |
|
|
$ |
40,353,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debt payable to unconsolidated
subsidiary grantor trust |
|
|
15,310,000 |
|
|
|
5,000,000 |
|
Other liabilities |
|
|
783,523 |
|
|
|
70,491 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
39,137,903 |
|
|
|
35,283,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
55,231,426 |
|
|
$ |
40,353,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Condensed Statements of Income |
|
|
|
|
|
|
|
|
|
|
|
|
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on time deposit |
|
$ |
79,931 |
|
|
$ |
13,852 |
|
|
$ |
5,497 |
|
Dividend from subsidiary |
|
|
514,307 |
|
|
|
1,955,584 |
|
|
|
1,760,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
594,238 |
|
|
|
1,969,436 |
|
|
|
1,765,736 |
|
Expenses: |
|
|
825,549 |
|
|
|
549,431 |
|
|
|
394,050 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
equity in undistributed net income
of subsidiaries |
|
|
(231,311 |
) |
|
|
1,420,005 |
|
|
|
1,371,686 |
|
Provision for income taxes |
|
|
800 |
|
|
|
800 |
|
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed
net income of subsidiaries |
|
|
(232,111 |
) |
|
|
1,419,205 |
|
|
|
1,370,886 |
|
Equity in undistributed net income of
subsidiaries |
|
|
6,510,481 |
|
|
|
3,558,470 |
|
|
|
2,811,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,278,370 |
|
|
$ |
4,977,675 |
|
|
$ |
4,182,676 |
|
|
|
|
|
|
|
|
|
|
|
75
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
Statements of Cash Flows |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,278,370 |
|
|
$ |
4,977,675 |
|
|
|
4,182,676 |
|
Adjustments to reconcile net income to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
5,700 |
|
|
|
0 |
|
|
|
0 |
|
Compensation associated with stock options |
|
|
5,784 |
|
|
|
3,856 |
|
|
|
22,404 |
|
Effect of changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
30,000 |
|
|
|
197,667 |
|
|
|
(250,006 |
) |
Other Liabilities |
|
|
20,399 |
|
|
|
0 |
|
|
|
0 |
|
Equity in undistributed net income
of subsidiaries |
|
|
(6,510,481 |
) |
|
|
(3,558,470 |
) |
|
|
(2,811,790 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
(170,228 |
) |
|
|
1,620,728 |
|
|
|
1,143,284 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiary trust |
|
|
(310,000 |
) |
|
|
0 |
|
|
|
(155,000 |
) |
Capital contribution to Bank |
|
|
(5,000,000 |
) |
|
|
0 |
|
|
|
(5,000,000 |
) |
Participation loan purchased |
|
|
(2,014,736 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(7,324,736 |
) |
|
|
0 |
|
|
|
(5,155,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity transactions, net |
|
|
467,000 |
|
|
|
1,174,083 |
|
|
|
802,582 |
|
Proceeds from unconsolidated subsidiary
Grantor trust |
|
|
10,310,000 |
|
|
|
0 |
|
|
|
5,000,000 |
|
Cash dividends |
|
|
(1,550,715 |
) |
|
|
(1,955,584 |
) |
|
|
(1,760,239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
9,226,285 |
|
|
|
(781,501 |
) |
|
|
4,042,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
1,731,321 |
|
|
|
839,227 |
|
|
|
30,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
1,163,049 |
|
|
|
323,822 |
|
|
|
293,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
2,894,370 |
|
|
$ |
1,163,049 |
|
|
$ |
323,822 |
|
|
|
|
|
|
|
|
|
|
|
76
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
22. |
|
UNAUDITED QUARTERLY RESULTS |
UNAUDITED QUARTERLY STATEMENTS OF INCOME DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
For the Quarter Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
Net interest income |
|
$ |
4,856 |
|
|
$ |
4,861 |
|
|
$ |
5,125 |
|
|
$ |
5,395 |
|
Provision for loan losses |
|
|
(177 |
) |
|
|
(177 |
) |
|
|
(88 |
) |
|
|
(6 |
) |
Noninterest income |
|
|
542 |
|
|
|
548 |
|
|
|
515 |
|
|
|
519 |
|
Noninterest expense |
|
|
(2,920 |
) |
|
|
(2,887 |
) |
|
|
(3,095 |
) |
|
|
(2,846 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
2,301 |
|
|
|
2,345 |
|
|
|
2,457 |
|
|
|
3,062 |
|
Provision for income tax |
|
|
(925 |
) |
|
|
(874 |
) |
|
|
(897 |
) |
|
|
(1,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,376 |
|
|
$ |
1,471 |
|
|
$ |
1,560 |
|
|
$ |
1,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.16 |
|
|
$ |
0.17 |
|
|
$ |
0.18 |
|
|
$ |
0.22 |
|
Diluted earnings per share |
|
$ |
0.16 |
|
|
$ |
0.16 |
|
|
$ |
0.18 |
|
|
$ |
0.21 |
|
Dividends per share |
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
For the Quarter Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2004 |
|
|
2004 |
|
|
2004 |
|
|
2004 |
|
|
Net interest income |
|
$ |
3,915 |
|
|
$ |
4,087 |
|
|
$ |
4,269 |
|
|
$ |
4,606 |
|
Provision for loan losses |
|
|
(192 |
) |
|
|
(97 |
) |
|
|
(131 |
) |
|
|
(134 |
) |
Noninterest income |
|
|
466 |
|
|
|
494 |
|
|
|
573 |
|
|
|
634 |
|
Noninterest expense |
|
|
(2,425 |
) |
|
|
(2,640 |
) |
|
|
(2,641 |
) |
|
|
(2,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
1,764 |
|
|
|
1,844 |
|
|
|
2,070 |
|
|
|
2,231 |
|
Provision for income tax |
|
|
(652 |
) |
|
|
(683 |
) |
|
|
(803 |
) |
|
|
(793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
1,112 |
|
|
$ |
1,161 |
|
|
$ |
1,267 |
|
|
$ |
1,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.15 |
|
|
$ |
0.17 |
|
Diluted earnings per share |
|
$ |
0.13 |
|
|
$ |
0.13 |
|
|
$ |
0.14 |
|
|
$ |
0.17 |
|
Dividends per share |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
For the Quarter Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2003 |
|
|
2003 |
|
|
2003 |
|
|
2003 |
|
|
Net interest income |
|
$ |
3,506 |
|
|
$ |
3,559 |
|
|
$ |
3,734 |
|
|
$ |
3,918 |
|
Provision for loan losses |
|
|
(175 |
) |
|
|
(200 |
) |
|
|
(40 |
) |
|
|
(100 |
) |
Noninterest income |
|
|
471 |
|
|
|
609 |
|
|
|
584 |
|
|
|
462 |
|
Noninterest expense |
|
|
(2,316 |
) |
|
|
(2,487 |
) |
|
|
(2,459 |
) |
|
|
(2,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
1,486 |
|
|
|
1,481 |
|
|
|
1,819 |
|
|
|
1,884 |
|
Provision for income tax |
|
|
(560 |
) |
|
|
(596 |
) |
|
|
(565 |
) |
|
|
(766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
926 |
|
|
$ |
885 |
|
|
$ |
1,254 |
|
|
$ |
1,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.12 |
|
|
$ |
0.11 |
|
|
$ |
0.15 |
|
|
$ |
0.14 |
|
Diluted earnings per share |
|
$ |
0.11 |
|
|
$ |
0.11 |
|
|
$ |
0.15 |
|
|
$ |
0.13 |
|
Dividends per share |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.22 |
|
|
$ |
0.00 |
|
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants or auditors on accounting and
financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Within the 90- day period prior to the filing of this Annual Report on Form 10-K, an
evaluation was carried out under the supervision and with the participation of the Companys
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of
the effectiveness of the design and operation of our disclosure controls and procedures. Based on
that evaluation, the CEO and CFO have concluded that the Companys disclosure controls and
procedures are designed to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities and Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in SEC rules and forms and
are operating in an effective manner.
There were no significant changes in the Companys internal controls or in other factors that could
significantly affect these controls subsequent to the date of their most recent evaluation.
PART III
Certain information required by Part III is incorporated by reference to the Companys
definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection
with the solicitation of proxies for the Companys 2006 Annual Meeting of Shareholders (the Proxy
Statement).
78
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Executive Officers of the Registrant
The executive officers of the Company and their ages as of December 31, 2005, are as follows:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position(s) |
Michael C. Mayer
|
|
|
49 |
|
|
President and Chief Executive Officer Redding
Bank of Commerce and Director |
Linda J. Miles
|
|
|
52 |
|
|
Executive Vice President, Chief Financial
Officer and Assistant Secretary |
Michael C. Mayer joined the Company in April 1997 and has served as Executive Vice President and
Chief Credit Officer of the Company from May 1997 to May 2000. From May 2000 until January 2001,
Mr. Mayer has served as Executive Vice President and Chief Operating Officer. As of January 1,
2001, Mr. Mayer was promoted to President and Chief Executive Officer of Redding Bank of Commerce
and serves on the loan, executive, long range planning and asset/liability committees of the Board
of Directors.
Linda J. Miles has served as Executive Vice President, Chief Financial Officer and Assistant
Secretary of the Company since October 1989. Before joining the Company, Ms. Miles served as
Senior Vice President and Chief Financial Officer for another independent bank. Ms. Miles serves on
the Asset/Liability committee and attends audit, executive and long range planning committee
meetings of the Board of Directors.
The remainder of the information required by this section is incorporated by reference to the
information in the section entitled Election of Directors and Executive Compensation in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section is incorporated by reference to the information in
the sections entitled Election of DirectorsDirectors Compensation and Executive Compensation
in the Proxy Statement.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this section is incorporated by reference to the information in
the section entitled Security Ownership of Certain Beneficial Owners and Management in the
Companys Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Some of the directors, officers and principal stockholders of the Company and their associates
were customers of and had banking transactions with the Company in the ordinary course of the
Companys business during 2005 and the Company expects to have such transactions in the future.
All loans and commitments included in such transactions were made in compliance with the applicable
laws on substantially the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other persons of similar creditworthiness, and in the
opinion of the Company, did not involve more than a normal risk of collectibility or present other
unfavorable features.
79
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed by Moss Adams LLP., for professional services rendered for the audit of
the Companys annual financial statements for the fiscal years ended December 31, 2005 and 2004 and
for the reviews of the financial statements included in the Companys Quarterly Reports on Form
10-Q for those fiscal years were $132,454 and $105,000 respectively.
Audit-Related Fees
Moss Adams LLP., did not render any professional services for information technology services
relating to financial information systems design and implementation for the fiscal years ended
December 31, 2005 and December 31, 2004.
Tax Fees
Moss Adams LLP., did not render any professional services for tax compliance, tax advice, or tax
planning during 2005.
All Other Fees
The aggregate fees billed by Moss Adams LLP. for services rendered to the Company, other that the
services described under Audit Fees and Audit-Related Fees and tax fees amount to $0 and $0 for
the fiscal years December 31, 2005 and 2004, respectively.
In discharging its oversight responsibility with respect to the audit process, the Audit Committee
of the Board of Directors obtained from the independent auditors a formal written statement
describing all relationships between the auditors and the Company that might bear on the auditors
independence consistent with Independence Standards Board Standard No.1, Independence Discussions
with Audit Committees, discussed with the auditors any relationships that may impact their
objectivity and independence and satisfied itself as to the auditors independence. The Committee
also discussed with management and the independent auditors the quality and adequacy of Bank of
Commerce Holdings internal controls and the outsourced audit functions, responsibilities,
budgeting and staffing. The Committee reviewed with the independent auditors their audit plans,
audit scope and identification of audit risks.
The Committee discussed and reviewed with the independent auditors all communications required by
auditing standards generally accepted in the United States of America, including those described in
Statement on Auditing Standards No. 61, as amended, Communication with Audit Committees, and
discussed and reviewed the results of the independent auditors audit of the financial statements.
The Committee also discussed the results of the internal audit examinations.
80
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) |
|
The following documents are filed as a part of this Form 10-K: |
|
(1) |
|
Financial Statements: |
Reference is made to the Index to Consolidated Financial Statements under Item 8 in
Part II of this Form 10-K.
|
(2) |
|
Financial Statement Schedules: |
All schedules are omitted because they are not applicable or the required information
is shown in the financial statements or notes thereto.
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
3.1
|
|
Articles of Incorporation, as amended.* |
3.2
|
|
Bylaws, as amended.* |
4.1
|
|
Specimen Common Stock Certificate.* |
10.1
|
|
Office Building Lease by and between David and Maria Wong and
Redding Bank of Commerce dated June 10, 1998.* |
10.2
|
|
Office Building Lease between Garian Partnership/First Avenue
Square and Redding Bank of Commerce dated July 16, 1998.* |
10.3
|
|
1998 Stock Option Plan.* |
10.4
|
|
Form of Incentive Stock Option Agreement used in connection
with 1998 Stock Option Plan.* |
10.5
|
|
Form of Nonstatutory Stock Option Agreement used in connection
with 1998 Stock Option Plan.* |
10.7
|
|
Directors Deferred Compensation Plan.* |
10.8
|
|
Form of Deferred Compensation Agreement Used In Connection With
Directors Deferred Compensation Plan.* |
10.9
|
|
Merchant Services Agreement dated as of April 1, 1993, between
Cardservice International, Inc. and Redding Bank of Commerce, as amended.* |
10.10
|
|
Employment contracts dated April 2001* |
10.11
|
|
Affiliated Business Arrangement Agreement * |
10.12
|
|
Office building lease by and between Mr. David Lanza and Redding
Bank of Commerce dated 9/13/2005.* |
10.13
|
|
Amendment to Employment contracts dated April 2001, filed
December 2005* |
10.14
|
|
Change in Control Agreements* |
11.1
|
|
Statement re: Computation of Earnings Per Share (see page 54). |
14.0
|
|
RBC Code of Ethics* |
16.1
|
|
Letter on Change in Certifying Accountants. * |
21.1
|
|
Subsidiaries of the Company. * |
23.1
|
|
Consent of Moss Adams LLP |
23.2
|
|
Consent of Deloitte & Touche LLP |
24.1
|
|
Power of Attorney (see page 82). |
32.1
|
|
Certification pursuant to
Section 906 of the Sarbannes-Oxley Act of 2002 |
|
|
|
* |
|
Previously filed with the Companys Registration Statement on Form 10 and by the Companys
filing of reports on Form 8-K. |
81
|
|
|
February 10, 2006
|
|
Financial presentation at Americas Community Bankers Investor conference |
January 31, 2006
|
|
Press announcement 2005 operating results |
December 23,
2005
|
|
Announcement Randy Eslick, Regional President Roseville Bank of Commerce |
December 22, 2005
|
|
Announcement Patrick J. Moty Executive Vice President |
December 21, 2005
|
|
Change in Control Agreements |
December 21, 2005
|
|
Amendment to Employment Agreements for Michael C. Mayer and Linda J. Miles |
December 21, 2005
|
|
Fourth Quarter Dividend Announcement. |
December 21, 2005
|
|
Acceleration of Stock Option Vesting |
December 19, 2005
|
|
Temporary Suspension of Trading under Registrants Employee Benefit Plans |
October 28, 2005
|
|
Third Quarter Earnings Release |
October 27, 2005
|
|
Creation of a Direct Financial Obligation Gifford Construction Contract |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 3, 2006.
|
|
|
|
|
|
|
|
|
|
|
BANK OF COMMERCE HOLDINGS |
|
|
|
|
|
|
|
|
|
|
|
By |
|
/s/ Michael C. Mayer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael C. Mayer |
|
|
|
|
|
|
|
|
President, Chief Executive |
|
|
|
|
|
|
|
|
Officer and Director |
|
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Michael C. Mayer and Linda J. Miles, and each of them, his or her true and lawful
attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities,
to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes
may do or cause to be done by virtue hereof.
82
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the capacities and on the
dates indicated:
|
|
|
|
|
Name |
|
Title |
|
Date |
|
|
/s/ Michael C. Mayer
|
|
President, Chief Executive Officer
|
|
April 3, 2006 |
|
|
Redding
Bank of
Commerce and Director |
|
|
|
|
|
|
|
/s/ Linda J. Miles
|
|
Executive Vice President and
|
|
April 3, 2006 |
|
|
Chief
Financial Officer and
Assistant Secretary (Principal
Financial and Accounting Officer) |
|
|
|
|
|
|
|
/s/ Harry L. Grashoff, Jr.
|
|
Chairman of the Board
|
|
April 3, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Welton L. Carrel |
|
|
|
|
|
|
Director
|
|
April 3, 2006 |
|
|
|
|
|
/s/ Russell L. Duclos |
|
|
|
|
|
|
Director
|
|
April 3, 2006 |
|
|
|
|
|
/s/ John C. Fitzpatrick |
|
|
|
|
|
|
Director
|
|
April 3, 2006 |
|
|
|
|
|
/s/ Kenneth R. Gifford, Jr. |
|
|
|
|
|
|
Director
|
|
April 3, 2006 |
|
|
|
|
|
/s/ Eugene L. Nichols
|
|
Director
|
|
April 3, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ David H. Scott
|
|
Director
|
|
April 3, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Lyle L. Tullis
|
|
Director
|
|
April 3, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Jon Halfhide
|
|
Director
|
|
April 3, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Orin Bennett
|
|
Director
|
|
April 3, 2006 |
|
|
|
|
|
83
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
3.1
|
|
Articles of Incorporation, as amended.* |
|
3.2
|
|
Bylaws, as amended.* |
|
4.1
|
|
Specimen Common Stock Certificate.* |
|
10.1
|
|
Office Building Lease by and between David and Maria Wong and
Redding Bank of Commerce dated June 10, 1998.* |
|
10.2
|
|
Office Building Lease between Garian Partnership/First Avenue
Square and Redding Bank of Commerce dated July 16, 1998.* |
|
10.3
|
|
1998 Stock Option Plan.* |
|
10.4
|
|
Form of Incentive Stock Option Agreement used in connection
with 1998 Stock Option Plan.* |
|
10.5
|
|
Form of Nonstatutory Stock Option Agreement used in connection
with 1998 Stock Option Plan.* |
|
10.6
|
|
Employment Agreement between the Company and Russell L. Duclos
dated June 17, 1997.* |
|
10.7
|
|
Directors Deferred Compensation Plan.* |
|
10.8
|
|
Form of Deferred Compensation Agreement Used In Connection With
Directors Deferred Compensation Plan.* |
|
10.9
|
|
Merchant Services Agreement dated as of April 1, 1993, between
Cardservice International, Inc. and Redding Bank of Commerce, as amended.* |
|
|
10.10
|
|
Employment contracts dated April 2001.* |
|
10.11
|
|
Affiliated Business Arrangement Agreement.* |
|
10.12
|
|
Office building lease by and between Mr. David Lanza and
Redding Bank of Commerce dated 9/13/05 * |
|
10.13
|
|
Amendment to Employment contracts dated April 2001, filed
December 2005* |
|
10.14
|
|
Change in Control Agreements* |
|
15.1
|
|
Statement re: Computation of Earnings Per Share (see page 54). |
|
14.0
|
|
RBC Code of Ethics* |
|
16.1
|
|
Letter on Change in Certifying Accountants.* |
|
21.1
|
|
Subsidiaries of the Company.* |
|
23.1
|
|
Consent of Moss Adams LLP |
|
23.2
|
|
Consent of Deloitte & Touche LLP |
|
24.1 |
|
Power of Attorney (see page 82).
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Companys
Chief Executive Officer. |
|
31.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification of the Companys Chief Financial Officer. |
|
32.1
|
|
Section 906 Certifications by Chief Executive Officer and Chief
Financial Officer. |
|
|
|
* |
|
Previously filed with the Companys Registration Statement on Form 10, SEC Form 10-K and
SEC Form 8-K. |